Posted on: 14th Nov, 2009 01:58 pm
If my husband and I are self employed, what numbers are the banks using when looking for the 31% DTI target to qualify? Our Gross Income or our Net income?
In general they look at gross income for individuals. In addition, they may actually increase your qualifying income based on items that are tax-exempt income, such as non-taxable pre-tax contributions and matching contributions to a 401k or IRA plan. However, if your income is self-employment, they are looking at the net income from the self-employment activity. That is, your business-related deductions, such as cost of inventory, don't count as income. Depreciation deductions are added back to net income. You'll need two years of tax returns to document income. The income is averaged. They may also want an income statement for the current year to see if revenue has dropped (recession, you know).
Also, there are two sets of debt ratios that lenders look at. The first is housing expense (including principal, interest, property insurance and property taxes), and the second one is total debt including credit cards, installment loans, student loans not in deferrment. Loans against retirement assets are not counted. The required debt ratios vary for different loan programs. In the case of conventional conforming loan programs, it isn't even possible to specify one set limit for debt ratio because the automated underwriting takes into account the entire set of credit qualifying parameters for each loan. Many portfolio loan programs (those not necessarily qualified for sale to Fannie Mae or Freddie Mac, or insurable by FHA or VA) only look at total debt ratio, not housing ratio at all, and a typical limit is 45%.
Also, there are two sets of debt ratios that lenders look at. The first is housing expense (including principal, interest, property insurance and property taxes), and the second one is total debt including credit cards, installment loans, student loans not in deferrment. Loans against retirement assets are not counted. The required debt ratios vary for different loan programs. In the case of conventional conforming loan programs, it isn't even possible to specify one set limit for debt ratio because the automated underwriting takes into account the entire set of credit qualifying parameters for each loan. Many portfolio loan programs (those not necessarily qualified for sale to Fannie Mae or Freddie Mac, or insurable by FHA or VA) only look at total debt ratio, not housing ratio at all, and a typical limit is 45%.