When you’re planning to buy a home, one of the factors that will determine whether or not you’ll be approved for a Texas home mortgage loan is your debt-to-income ratio (DTI).
What is a DTI, and how is it determined?
This is the number that reveals what percentage of your monthly income goes directly to pay debts, before you begin paying for other necessities such as food, clothing, fuel for your vehicle, etc.
To calculate that number, you simply divide your monthly debt by your monthly income. Not surprisingly, a monthly mortgage payment will probably be the largest item in the debt column.
As an example: If your monthly income is $6,000 and your monthly debt is $2,000, you have a 33% debt to income ratio. ($2,000 divided by $6,000.)
On the debt side, list all of your monthly debts, including credit card payments, installment payments such as the monthly payment on your car, student loans, alimony, and child support payments. When calculating credit card payments, use the monthly minimum, even though you may be paying more in an effort to eliminate debt.
Since you don’t yet have a mortgage payment, your lender will first calculate your DTI without the mortgage payment. Then he or she will do a second calculation using the projected payment on your new mortgage loan, including taxes, homeowners insurance, and mortgage insurance.
Your credit report will show most of the debt you owe, but you may also be asked to show credit card statements or installment contracts. Do NOT acquire any new debt once your lender has calculated your DTI. Your credit report will be checked again just prior to closing, and new debt will either cause your interest rate to rise or cause the loan to be denied.
On the income side, list your wages or salary and any verifiable income from part-time jobs, self-employment ventures, alimony, and income producing assets such as real estate or stocks.
To verify income, your lender will need to see recent pay stubs and W-2 forms for the past two years from all of your employers. To verify self-employment income and income from assets, you’ll need to show tax returns and bank or brokerage statements. You may also need rental agreements.
Debt-to-income ratios are calculated on your pre-tax income, not the actual dollars that go into your pocket.
The lower your DTI, the better your lender will like it.
Why? Because the Consumer Financial Protection Bureau says that consumers with high debt to income ratios are the most likely to fall behind on mortgage payments or lose their homes to foreclosure. A prolonged illness or accident that prevents work can spell financial disaster.
Low debt-to-income ratios say you can probably keep making your mortgage payments even if your income takes an unexpected drop.
Of course the risk is tied to the income. Consider that at 50% debt-to-income, a person earning $15,000 per month has considerably more disposable income after debt service ($7,500) than a person earning $5,000 ($2,500).
What is an acceptable debt-to-income ratio? Some lenders quote 36%. Others say 43% is the cut-off point.
Here at Homewood Mortgage, the Mike Clover Group, we don’t have a cap on DTI. Whatever the software will accept, via Freddie Mac and Fannie Mae, we will do. We typically see Texas home loans getting approved up to a 50% debt to income.
Before you begin shopping for a home, contact us at the Mike Clover Group. We’ll help you get pre-qualified so you can make a solid offer on that Texas home.
We’re known all over Texas for our friendly service, low fees, and fast closings, so get in touch today.