How to Calculate your debt to income?
Hello! Thank you so much for coming back to our pre-qualify yourself series. If you have already followed the other two blogs, we have already talked about the basics of pre-qualifying, we talked about how to calculate your income.
We’re going to talk about debt-to-income ratios now or DTI, and to be really honest, I think this is such a crucial topic because, in my opinion, this is how the bank determines your creditworthiness.
I am Miguel Gomez and here in Top-Level Home Loans, we talked about tips and strategies on how you can obtain your home loan, throught mortgages.
As I said previously, we are discussing debt to income ratios, so let me first define them before we completely discuss how to calculate them.
In its most basic form, it consists of a comparison of your debts and your income. The numbers that you really need to keep in mind here are 45/50 because the bank will typically examine this in a fractional format.
- 45 Front-end ratio
- 50 Back-end ratio
We basically attempt to qualify all of our borrowers in this manner. From there, there are certainly other considerations, such as credit scores and programs that they participate in, but if I’m looking at it to get a sense of where you are at, this is what I’m looking at.
45 Front-end ratio
Therefore, the 45 front-end ratio states that your monthly mortgage payment cannot exceed 45% of your gross income. So, since we have discussed income in the last blogs, if we multiplied that amount by 45%, we can determine how much the entire payment on your mortgage may be.
In a future blog, we’ll discuss mortgage payments, allowing you to complete the circle by estimating what a typical mortgage payment would be, that way you can bring this whole thing full-circle.
50 Back-end ratio
We referred to the second component of that proportion as the back-end ratio.
We want to keep that number under 50. It is a calculation of your debts, including the house payment and minimum payments on all of your accounts.So that includes everything; they don’t want you to make more than 50% of your total income that you’re earning right now.
Your debts are extremely crucial factors, so the general rule is that anything that affects your credit needs to be taken into consideration.
There are certain exceptions to this rule; if you are correctly documenting any accounts that you are not paying for, we may be able to exclude them from your debt-to-income ratios.
Other factors include student loans. If you have student loans that are in deferment or forbearance or that you are not currently making payments on, in this case, we will factor those payments into the calculation of your debt-to-income ratios.
How to calculate it
With this, it is very important that you take your income, then multiply it by that 45%, this gives you your max of your house payment.
But, if you have very little debts, there might be a position where if you take 50% of your income, subtract your debts, that number might be higher than 45%, if that’s the case, we’ll keep going back until we get to that 45% for you.We don’t want to push you past that because there are loan programs out there that might allow you to go a little bit higher than that, but this is what you’re aiming for just to pre-qualify yourself.
You determine your debt to income ratios in this way. We will cover how to calculate your house payment in the next blogs.Now that we know how much our possible house payment will be, we need to determine what kind of house we can buy with that amount or how much the house payment would be for the kind of home we want. However, we will discuss that in our next Blog.
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Thank you!
- Miguel
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