I feel that a great place to begin in regards to mortgage education is how to calculate your DTI (Debt to Income Ratio). We are living in a time where consumer debt has dramatically increased while at the same time many families have lost income. It is important to know how much of your income is going towards your mortgage(s), credit card bills, auto loans, real estate taxes, homeowners insurance and condo fees if applicable. It is important to have an idea of your DTI, because it is important to know exactly where your money is going on a monthly basis. It is also one of the key factors that lenders and underwriters will look at when preparing to make a decision of approval. So, what is your DTI? Your DTI is the percentage of money going out each month compared against your GROSS monthly income. The lower that this percentage is, the stronger your loan application will be. We like DTI’s to be less than 45% for approval purposes; however we have seen loans close with a 60% DTI, as long as there are very strong compensating factors such as a significant amount of liquid assets. The impact that the DTI percentage will have will vary depending on which lender and loan program you’re applying for. Again, please keep in mind that these figures are for loan approval purposes only. In reality, I would love nothing more than to see all of my clients have a 20% DTI or less. The reason being, I would rather see you getting to enjoy you’re hard earned paychecks rather than having to use it to pay creditors. How is the DTI calculated? Very simply, we add up all of your monthly payments that are active and open on your credit report plus your real estate taxes and homeowners insurance and divide that figure by your GROSS monthly income. There are certain items that do not get factored into your DTI. This would include your monthly telephone, gas, water and electric bills just to name a few. So, in between now and the next newsletter, take a few minutes, sit down and calculate your own DTI. The next time you’re dealing with a mortgage professional, present him with the figure and they will immediately know that they are dealing with someone who knows how this industry works!
All the Best!