Mortgage Guideline Tip: Qualifying debt to income ratios

A  major factor in qualifying for a mortgage is the borrower's debt to income ratio (DTI).

When calculating your debt to income ratio, you first add up all of your monthly minimum debt payments and then divide that by your gross monthly income.  Your potential future mortgage payment is put into that ratio.  

For example if you have a $200 car payment, $100 dollars in credit card debts, and your future mortgage payment is going to be $1200, you add them up and they total $1500 in total monthly debt.  ($200 + $100 + $1200 = $1500).  You only want to include payments that would be on your credit report for this.  Payments like an electric bill or car insurance do not get calculated in.  

Then say your monthly gross income before taxes and deductions is $5000.  To calculate your DTI, you would divide $1500 (your monthly debt) by $5000 (your monthly income).  This equals 30%.    So that means your DTI is 30%.  ($1500/$5000 = .300 or 30%).

Typically to qualify for a mortgage, you don't want your debt to income ratio to exceed 43%.  In some cases, with some loan programs, you could qualify with a higher DTI.  It is important to note that to qualify for a higher DTI you must have compensating factors.  These factors include a great credit score, a steady employment history, and a nice amount of savings.  I would advise to keep 43% in your mind as a qualifying DTI until getting pre-approved at a higher amount from your lender.  

I have outlined the highest possible qualifying DTI ratios below for each loan program.

VA Loans: the highest possible DTI is 60%. (only a possibility with a credit score greater than 660)

FHA Loans: the highest possible DTI is 50% (only a possibility with a credit score greater than 620)

USDA Loans: the highest possible DTI is 43%

Conventional Loans: the highest possible DTI is 45%

Jumbo Loans: the highest possible DTI is 43%

Delaware's First Time Home Buyer Program - highest possible DTI is 45% (660 credit score required for this program).

During a pre-approval we will ask what your desired purchase price and monthly payment is, and see if you can qualify for that.  We can also show you what your max would be, which is determined by your DTI.  This will help us provide affordable estimates to you that will show you what your payments would look like.

You don't have to figure how much you could qualify for alone.  Please reach out to us at anytime.