What is Debt to Income Ratio?

[vc_row][vc_column width=”1/1″][ultimate_heading main_heading=”What is Debt to Income Ratio?” heading_tag=”h2″ alignment=”left” spacer=”line_only” spacer_position=”bottom” spacer_img_width=”48″ line_style=”solid” line_height=”1″ line_color=”#333333″ icon_type=”selector” icon_size=”32″ icon_style=”none” icon_color_border=”#333333″ icon_border_size=”1″ icon_border_radius=”500″ icon_border_spacing=”50″ img_width=”48″ line_icon_fixer=”10″ main_heading_style=”font-weight:bold;” main_heading_color=”#000000″][/ultimate_heading][ultimate_spacer height=”15″ height_on_tabs=”10″ height_on_mob=”5″][/vc_column][/vc_row][vc_row][vc_column width=”1/4″][vc_single_image image=”2306″ border_color=”grey” img_link_large=”” img_link_target=”_self”][/vc_column][vc_column width=”3/4″][vc_column_text]Debt to Income Ratio is a government guideline used to determine how much loan you can afford. It is usually written something like this, 30/41. The first number is called the front end and the last number is called the back end.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column width=”1/1″][vc_column_text]

Debt to Income-Front End Ratio (The Housing Expense)

This guideline compares your income – or your total household income – to the amount of mortgage payment you’re considering.

To calculate the “housing expense” part of the formula, take the mortgage payment (principal + interest) and add to it Property Taxes, Insurance, Government Mortgage Insurance, and HOA fee (if applicable).  Hence the term “PITI” (principal, interest, taxes, and insurance).

Example
$998-Mortgage Payment Principal and Interest
$150-Property Taxes
$65-Home Owners Insurance (insures you against loss)
$157-Government Mortgage Insurance (insures lender against loss)
$0-HOA (normally for condos)
$1370 = Total Housing Expense

If you and your spouse make $4600 a month then here is the simple formula for finding your front end debt to income ratio.

$1370/$4600 = 29%

Normally lenders will loan up to 30% of your total household income for the purpose of a mortgage. Under certain conditions some lenders, such as us, can loan up to 45% of your total household income.[/vc_column_text][vc_column_text]

Debt to Income-Back End Ratio(All Major Monthly Payments) 

This is all the major monthly payments including your mortgage payment (PITI).  To arrive at this amount, the lender will consider…

• Your car payment.
• Your credit card debt and payments.
• Any IRS liens or payments due.
• Any other payments and debts you have (boat, second home, etc.)

Example
$1370-Mortgage Payment
$150-Car Loan
$75-Credit Card 1
$25-Credit Card 2
$200-RV Loan
$66-Line of Credit
$1886 = Total of Major Payments

If you and your spouse make $4600 a month then here is the simple formula for finding your back end debt to income ratio.

$1886/$4600 = 39%[/vc_column_text][vc_column_text]

Not All Lenders Created Equal 

You should know that each mortgage company also has internal guidelines for debt to income ratio. A bank for instance might not allow your debt to income ratio to be higher than 30/41 but another mortgage company might allow a higher ratio.

That’s why it’s important to know that not every bank, credit union or mortgage company have the same rules or guidelines.

The higher your debt to income ratio the higher your interest rate or closing costs can be, depending on the company. One mortgage company might charge you a lot more than another based on the same debt to income ratio.

Doing a little homework on your own will literally save you thousands over the term of your loan.

As always, if you have any questions about this article or know of anyone would benefit from our service please give me call.

801-627-8888

Juli Gleed[/vc_column_text][/vc_column][/vc_row]