Posted on: 25th Nov, 2007 06:51 pm
I'm a bit confused about debt to income ratios as they are used in the mortgage industry. There is conflicting information depending on which websites you visit. Possibly because different companies use different formulas.
Here are my questions:
Should I use Pre or Post tax income?
Should I include normal monthly living expenses (Food/Utilities/cable/insurance,etc.) or just credit card & loan payments?
What is an acceptable debt to income ration?
Is there anything else I should be aware of?
My wife and will be purchasing a new home this spring and have considered purchasing a used car, but dont want to throw the debt to income out of wack. Our current pre tax income is $6333/month, post tax $4973. Our monthly mortgage & Auto Loan payments are $1449. We have no credit card debt.
The home we intend to purchase will have a mortgage payment of $1350/month (up from $880.00).
Here are my questions:
Should I use Pre or Post tax income?
Should I include normal monthly living expenses (Food/Utilities/cable/insurance,etc.) or just credit card & loan payments?
What is an acceptable debt to income ration?
Is there anything else I should be aware of?
My wife and will be purchasing a new home this spring and have considered purchasing a used car, but dont want to throw the debt to income out of wack. Our current pre tax income is $6333/month, post tax $4973. Our monthly mortgage & Auto Loan payments are $1449. We have no credit card debt.
The home we intend to purchase will have a mortgage payment of $1350/month (up from $880.00).
Hello Jinx,
Debt to income ratio shows the percentage of your monthly income that goes towards the payment of your debts. It is calculated by dividing your total monthly debt by your gross monthly income.
1. The pre-tax income is considered to be your gross monthly income and this is used for calculating debt to income ratio.
2. The utilities, cable or food bills are not included. But credit card and other loans are considered as debts.
3. To get a mortgage approval, lenders generally accept up to 36% of debt ratio.
4. Apart from this your credit score and credit history are also considered before mortgage approval.
You will find further information on debt to income ratio at http://www.mortgagefit.com/back-end.html. You may have a look at it.
Have you already started to look for lenders?
Debt to income ratio shows the percentage of your monthly income that goes towards the payment of your debts. It is calculated by dividing your total monthly debt by your gross monthly income.
1. The pre-tax income is considered to be your gross monthly income and this is used for calculating debt to income ratio.
2. The utilities, cable or food bills are not included. But credit card and other loans are considered as debts.
3. To get a mortgage approval, lenders generally accept up to 36% of debt ratio.
4. Apart from this your credit score and credit history are also considered before mortgage approval.
You will find further information on debt to income ratio at http://www.mortgagefit.com/back-end.html. You may have a look at it.
Have you already started to look for lenders?
Hi Jinx,
Welcome to this forum.
Jenkiin has given you very good information. I would just like to add that your present debt to income ratio is good; almost 23%. But after taking the mortgage, your debt to income ratio will be almost 44%. So I shall request you think twice before purchasing the used car, because it will heart your debt to income ratio. Consult with your real estate agent before take any decision.
Thanks,
Larry
Welcome to this forum.
Jenkiin has given you very good information. I would just like to add that your present debt to income ratio is good; almost 23%. But after taking the mortgage, your debt to income ratio will be almost 44%. So I shall request you think twice before purchasing the used car, because it will heart your debt to income ratio. Consult with your real estate agent before take any decision.
Thanks,
Larry
36% is rather conservative. Not that you should purchase a car, but 43% is a more customary DTI. However, less is always better.
DTI as high as 65% can be approved by the lender but the rest of the file needs to be very strong.
There are 2 ratios being looked at by an underwriter. Top ratio which is % of your income (this is gross income for W2 employees and adjusted gross income for self employed) going towards home expences ( mortgage payment, home taxes, insurance and any assosiation fees). Bottom ratio is % of your income going towards your home expences plus your other revolving and installment payments (typically everything on your credit report). If either ratio is too high to fit standards the underwriter has to approve or deny manually.
There are 2 ratios being looked at by an underwriter. Top ratio which is % of your income (this is gross income for W2 employees and adjusted gross income for self employed) going towards home expences ( mortgage payment, home taxes, insurance and any assosiation fees). Bottom ratio is % of your income going towards your home expences plus your other revolving and installment payments (typically everything on your credit report). If either ratio is too high to fit standards the underwriter has to approve or deny manually.
You are correct in asking your questions?
Lenders calculate Debt Ratios in different ways (as you speculated)
"I use Pre or Post tax income? "
Normally you would use your gross income (before taxes) unless you get SSI or similar non taxed payments. (this is why I tell everyone not to ask the loan officer what you can afford but ask yourself...which you have done.)
"Should I include normal monthly living expenses (Food/Utilities/cable/insurance,etc.) or just credit card & loan payments? "
Nope only items that show up on your credit report will count in your ratio.
"What is an acceptable debt to income ration? "
below 50% for total bills... have seen them as high as 70%.... I recommed no higher than 30% for your mortgage payment and no higher than 50% for total payments.
"My wife and will be purchasing a new home this spring and have considered purchasing a used car, but dont want to throw the debt to income out of wack. "
If you buy a car your credit score will go down for a while. (how long depends on the rest of your credit profile) And yes it will definately change your debt ratio.
$6333/month, post tax $4973.
$1449
$1350= 2799 total payments DIVIDED BY 6333 income = 44% DTI
and
your housing ration would be 21%
so
you have ratios of ... 21% top / 44% bottom
Lenders calculate Debt Ratios in different ways (as you speculated)
"I use Pre or Post tax income? "
Normally you would use your gross income (before taxes) unless you get SSI or similar non taxed payments. (this is why I tell everyone not to ask the loan officer what you can afford but ask yourself...which you have done.)
"Should I include normal monthly living expenses (Food/Utilities/cable/insurance,etc.) or just credit card & loan payments? "
Nope only items that show up on your credit report will count in your ratio.
"What is an acceptable debt to income ration? "
below 50% for total bills... have seen them as high as 70%.... I recommed no higher than 30% for your mortgage payment and no higher than 50% for total payments.
"My wife and will be purchasing a new home this spring and have considered purchasing a used car, but dont want to throw the debt to income out of wack. "
If you buy a car your credit score will go down for a while. (how long depends on the rest of your credit profile) And yes it will definately change your debt ratio.
$6333/month, post tax $4973.
$1449
$1350= 2799 total payments DIVIDED BY 6333 income = 44% DTI
and
your housing ration would be 21%
so
you have ratios of ... 21% top / 44% bottom
What about a new car lease? Is that considered the same as a car purchase?
I think it matters to some extent. What's your situation?
to nicole a car lease pament will be calculated into your debt to income ratio