Debt To Income

Debt to Income or DTI ratio is one of the main criteria for mortgage loans and is reviewed for any loan that looks at the borrower’s income.

What is DTI comprised of and how is it calculated?

DTI = Monthly debt payments / Gross Income

Monthly debt payments include the minimum monthly debt payments on your credit report (ie. mortgage loans, auto loans, personal loans, credit lines, credit cards, student loans, and any other debt reported to credit) as well as recurring monthly debt not reported on credit such as child support, alimony, continued rent if applicable. You also need to add in the projected total housing payment as part of your monthly debt expense (principal, interest, tax, insurance, dues).

Exclusions/exceptions to monthly debt:

• Utilities such as water, gas and electric bills, as well as auto or health insurance, are not counted as monthly debt for most loan programs

• Conventional loan programs has the possibility of excluding installment debt with less than 10 payments left (student loans, auto loans and personal loans are examples of installment loans)

• Installment loans paid by others where you can show it being paid out of someone else’s bank account for 12 consecutive months can be excluded

• Mortgage loans paid by others may also be excluded if separate paying party is also on mortgage and has paid for 12 consecutive months

• Student loan debt

  • Conventional - If zero is the the income based repayment plan minimum due then can be excluded, if it’s only deferred or in forbearance and showing zero for payment then you need to count 0.5% when underwriting thru Freddie or 1% when underwriting thru Fannie.

  • FHA - Can not be excluded, if showing zero payment count 0.5%

  • VA - Can be excluded only when deferred for 12 months+ post closing, as verified by student loan lender. Otherwise, zero payment will be calculated using 5% annual rate against balance divided by 12 for monthly payment amount

• Collections need to be factored in; 5% of loan balance is typically counted as the monthly payment amount when no monthly payment amount is listed on credit or payment plan not established. Note FHA has a requirement collection has to be paid in full above a certain balance.

• Charge offs can be excluded from monthly debt

• Medical [collection] debt is excluded from monthly debt

Your gross monthly income is the sum of all of your earnings, including hourly wages, salary, commissions, bonuses and tips before taxes are taken out. Other sources of income can also be considered such as interest income, retirement, pension, disability, social security, alimony, child support, rental property and investment income.

Maximum DTI limits by Loan Program

Conventional - 50%

FHA - 56.99% (with automated approval, manual underwriting approval capped at 50%)

USDA - 41% general, can be slightly higher with very strong compensating factors

VA - No DTI limits with automated approval, manual underwriting capped by lender