Posted on: 05th Oct, 2007 09:15 pm
Can you please tell me why do lenders take my gross income while calculating debt to income ratio, when then know that I only have net income that can be used to pay off my debts.
Excellent question Vick.
Many people have wondered that same question and I too have often thought why they don't base what you can afford on what you actually take home. When in fact your gross has nothing to do with what you can afford to pay.
The fact is that based on common assuptions of taxes and other factors the ratios are based off of gross and that is why they are between 20-50% DTI. If they were based off of net they might be higher at say 40-70%. But that woudn't sound so good and people might actually think about what they are doing before jumping into a house they can not afford.
Great question which raises a lot of issues that are currently being looked at in the mortgage industry.
Many people have wondered that same question and I too have often thought why they don't base what you can afford on what you actually take home. When in fact your gross has nothing to do with what you can afford to pay.
The fact is that based on common assuptions of taxes and other factors the ratios are based off of gross and that is why they are between 20-50% DTI. If they were based off of net they might be higher at say 40-70%. But that woudn't sound so good and people might actually think about what they are doing before jumping into a house they can not afford.
Great question which raises a lot of issues that are currently being looked at in the mortgage industry.
The main reason for that is what you take home is not nessesarily what you get at the end of the year when you filed your taxes. YOu might get return, you might get deduction so the gross income is a more accurate representation of your income. That of cource exludes business owners that is why for them the adjusted gross income is used.
Thanks Eric and Eugene for the replies.
Just one more question. Why is my monthly expense on food, grocery, entertainment not included in my total monthly debt. After all they are also my expenses.
Just one more question. Why is my monthly expense on food, grocery, entertainment not included in my total monthly debt. After all they are also my expenses.
If you have borrowed something or owed something from others then it is your debt but food, grocery, entertainment will not be included in your monthly debt because these are only expenses.
The bank makes sure you got enough money to live by setting the debt to income ratio at 40-45% meaning that 55-60% is left to pay your bills and taxes :)
Those items are not consitent and therefore are not based on a monthly bill. As Eugene stated they assume that you will have expenses and calculate what they allow based on those assumptions.
I suspect that you had a point to make with your question... That lenders allow people to get into loans that they cannot afford. And you are right if that is what you were trying to infer. HOWEVER I want to state that people are ultimately responsible for their own actions. And I don't care who you are if you don't make enough to cover the obligations that you agree to you are an %$##$%. No offense to anyone who has been duped or tricked but there are many who simply wanted "more house" or a "better neighborhood" and are now realizing that they aren't getting a "raise" or a "better job" and can no longer afford the payments.
IT IS UP TO EACH AND EVERY PERSON TO BE RESPONSIBLE FOR THE THINGS THAT THEY SAY AND DO. NOBODY CAN TELL YOU WHAT IS BEST FOR YOU ESPECIALLY YOU WHEN IT COMES TO THINGS LIKE DEBT RATIOS.
The debt ratio is more for the lender and their investors to meet their underwriting guidelines. It is not a determination of what a borrower can afford. They only use items found on a credit report usually so this obviously leaves out a lot of monthly bills and expenses.
You are the only person who knows what you can afford for a house every month and it is YOUR responsiblity to stick to that amount no matter what anyone else says.
I suspect that you had a point to make with your question... That lenders allow people to get into loans that they cannot afford. And you are right if that is what you were trying to infer. HOWEVER I want to state that people are ultimately responsible for their own actions. And I don't care who you are if you don't make enough to cover the obligations that you agree to you are an %$##$%. No offense to anyone who has been duped or tricked but there are many who simply wanted "more house" or a "better neighborhood" and are now realizing that they aren't getting a "raise" or a "better job" and can no longer afford the payments.
IT IS UP TO EACH AND EVERY PERSON TO BE RESPONSIBLE FOR THE THINGS THAT THEY SAY AND DO. NOBODY CAN TELL YOU WHAT IS BEST FOR YOU ESPECIALLY YOU WHEN IT COMES TO THINGS LIKE DEBT RATIOS.
The debt ratio is more for the lender and their investors to meet their underwriting guidelines. It is not a determination of what a borrower can afford. They only use items found on a credit report usually so this obviously leaves out a lot of monthly bills and expenses.
You are the only person who knows what you can afford for a house every month and it is YOUR responsiblity to stick to that amount no matter what anyone else says.