Debt to Income Ratios
The debt-to-income ratio is a very important part of the approval process. This is the main way the people working on your loan can gauge your qualification for making the proposed payment for your new mortgage. The basic calculation is Monthly Debt Service/Gross Monthly Income=Debt to Income Ratio (DTI). A full evaluation will be conducted on your ability to repay the new mortgage.
More in depth:
Monthly Debt Service is a potentially misleading term, as it is limited to certain monthly debts. It does not include health insurance, auto insurance, gas, utilities, cell phone, cable, groceries, or other non-recurring life expenses.
The debts evaluated are:
- Any/all car, credit card, student, mortgage and/or other installment loan payments. If a payment is reporting to your credit report, it will be counted as part of your monthly debt service.
- Collections with a lump sum or monthly payment due.
- Alimony or child support.
- Private party notes payable.
- Property Taxes, Insurance, and HOA dues for other properties you own, the home you live in now or the one you would like to buy.
Gross monthly income- The income evaluation process can be just as complicated. If you are on a fixed salary with no other types of income, the evaluation can be very simple. If you are self employed and own 3 rental properties, the evaluation can be very complicated. In any case, all income types will be considered for use in qualifying for the loan you’ve requested.