Debt-to-Income Ratios

Oct 09, 2022 By Susan Kelly

The ratio of the whole amount of debt you carry to the total amount of income you bring in is referred to as your debt-to-income ratio (DTI). If your gross monthly income is $5,000 and you have debt expenditures of $2,000 per month, the calculation would be as follows:

  • $2,000/$5,000= 40% (DTI)

According to research on mortgage loans, borrowers with higher DTIs often have a harder time meeting their monthly mortgage obligations. When considering purchasing a home, mortgage lenders will consequently evaluate your DTI to see how much of a mortgage payment you can comfortably afford.

However, they won't only look at your DTI as its whole. Lenders will also look at the proportion of your gross income toward housing-related debt. If you pay $1,650 per month for all of your housing-related expenditures, and your gross monthly income is $5,000, then your housing-related debt-to-income ratio would look like this:

  • $1,650/$5,000= 33% (housing DTI)

DTI Requirements for Mortgages

To qualify for a loan guaranteed by the FHA, your total housing obligations must not exceed 31% of your annual gross income. Your entire debt should not be more than 43 percent of your gross revenue at any time.

The greatest total DTI ratio that may be reached by Fannie Mae, which is a government-sponsored enterprise (GSE), is 36%. If a borrower satisfies certain additional standards, including credit score and reserves, Fannie Mae will accept total DTIs up to 45%.

Another GSE that funds house loans is Freddie Mac, which has a maximum housing cost ratio of 28% and a maximum DTI of 36%. This number may go up to 45% if the borrower satisfies the conditions for their credit score and other factors.

Here are a few samples of the projected monthly payments if you purchased a property with a price tag of $374,900 using our mortgage calculator to do the calculations for you. If you choose an FHA loan, make a down payment of 3.5% of the purchase price, commit to a 30-year term, and get an APR of 3.5%, your anticipated monthly payment will be $2,461.

This consists of the principle, the interest, the property taxes, the homeowner's insurance, and the private mortgage insurance (PMI). To qualify for a loan from the Federal Housing Administration (FHA), your pretax income would need at least $7,940 per month and $95,283 per year. The median home price in the United States in 2015 was $374,900.

If you go with a conventional loan sponsored by Freddie Mac, put down 3% of the purchase price, commit to a 30-year term, and obtain an annual percentage rate of 3.5%, your housing cost ratio may be restricted at 28%. To purchase the identical property that costs $374,900, you would need a pretax salary of $8,825 per month and $105,900 per year. The stricter standards for DTI have led to an increase in the minimum required income.

Have you given any thought to the home of your dreams? Utilize our mortgage calculator to see what your monthly payment will be. Check the guidelines for your home loan program to see what the maximum ratio of housing costs to income is allowed to be. The last step is to calculate the minimum income necessary each month by dividing your monthly payment by the ratio of housing expenses to monthly income.

The Repercussions of Your Initial Investment

Because it will either raise or lower the total amount you are borrowing, the size of your down payment will impact the amount of pre-tax income you will need. The Federal Housing Administration mandates that you make a down payment of at least 3.5%, but if your credit score is between 500 and 579, the required down payment increases to 10%. If you want to avoid paying private mortgage insurance (PMI) on a traditional loan, you'll need to make a down payment of at least 20 percent. The following is an overview of what you may anticipate putting down on a property that costs $374,900 using each of the available down payment options:

  • The down payment for an FHA loan at 3.5% is $13,122.
  • 10% FHA required down payment is $37,490.
  • The conventional down payment of 20% is equal to $74,980.

My Income Went Through A Significant Shift. How Can I Determine The Value Of This Adjustment?

Your income will determine the maximum amount of the monthly mortgage payment you are eligible for. You may calculate the largest possible payment for your monthly mortgage by adding up your monthly gross income and multiplying that number by the maximum debt-to-income ratio for the loan program in which you are interested. The result will be the highest possible monthly payment for your mortgage.

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