Diana Walton Home Buyer's Blog is a comprehensive dialogue designed to keep you informed with up to the minute information to help you make informed decision regarding your real estate goals.
What is debt-to-income ratio (DTI)?
The debt-to-income ratio (DTI) compares your monthly debt expenses to your monthly gross income. To calculate your debt-to-income ratio, first add up all the payments you make a month to service your debt. That includes your monthly credit card payments, car loans, other debts (payday loans, investment loans) and your housing expenses - either rent or the costs for your mortgage principle, interest, property taxes and insurance (PITI) and any homeowner association fees.
Next, divide your monthly debt repayments by your gross income per month (before taxes are deducted). Multiply that number by 100 to get your DTI as a percentage.
An applicant has $4,500 gross monthly income. The maximum mortgage payment is:
$4,500 X .30 = $1,350
Their total debts come to:
$25 Master Card
$625 per month
Remember, their total debts (mortgage plus other debts) must be less than or equal to 40% of their gross monthly income.
$4,500 X .40 = $1,800
$1,800 is the maximum debt the borrower can have, debts and mortgage payments combined. Can the borrower keep all their debts and have the maximum mortgage payment allowed? NO!
In this case, the borrower, since they have high debts, must adjust the maximum mortgage payment downward, because:
$1,975 - which is more than the $1,800 (40% of gross income) we calculated above.
The maximum mortgage payment is therefore:
$1,800 - $625 (monthly debt) = $1,175
Always remember, when you have great credit, there are things you can do to make lenders think twice about approving your mortgage loan.
Diana Walton Licensed Real Estate Advisor 281.923.1118