Home loans: Debt to Income Ratio

DTI or debt to income ratio is one of the most important factors that determine loan decisions. The qualifying debt to income ratio seems to get lower and lower as the conditions in the housing market continue to be grim and grey. Exceptions that are being allowed are also decreasing as time progresses. This has certainly affected the prospective home buyers.

Home buyers should calculate their DTI. The first thing to be done is to tally monthly payments excluding utility bills, cable bills etc. Decide on a budget for a house. Add this house budg3et amount to the monthly obligatory payments and divide this sum by gross monthly income. The percentage obtained is your debt to income ratio. Take for example, a monthly salary of three thousand dollars, a monthly car payment of $285 and a monthly credit card payment of $48. 

The DTI here would be sum of payments ($1133) divided by income ($3000) which is $38. This is quite a decent and normal DTI. The DTI has to be approved by an automatic underwriting system. Once this is done the official underwriter would have no reasons to reject it. This was the scenario till some time ago, but things are on the change and it is not unusual to come across cases where loans have been rejected by underwriters even after being approved by the automatic underwriting system. This seems to be more common where more than twenty percent down payment is agreed upon. This is mainly due to the fact that in loans with less than twenty percent down payment mortgage insurance is involved.

The automatic underwriting system was created by guidelines issued by Fannie and Freddie. It does not protect mortgage insurance companies who underwrite these loans. The insurance companies have their own guidelines which they use for loan scenarios. Thus in the current loan atmosphere a DTI of 45% is ideal for a conventional loan. Even with such a decent DTI, an excellent credit score and some reserve money would be able to add more confidence to the loan application. This DTI is for loans which have monthly mortgage insurance. A conventional financing would be available with a DTI of 45%.

The requirements for other loan types are even more conservative. FHA financing would require a DTI of 43% while 41% is required for VA and Rural Housing. These are more flexible if an approval is attained by automatic underwriting system and with a little reserve money. A good credit score is always a plus in any situation like in Rural housing the DTI can be crossed if evidence off good credit history, credit score and balance between spending on housing and new income.

These guidelines should be considered while dreaming of a new home. These will certainly help you to be prepared while applying for a loan in these difficult times. Another way is to get pre qualified preferably with a lender so that you are more confident and your dreams need not have any limitations.