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Lowering your debt to income ratio
(DTI)

· first time homebuyer,REAL ESTATE,debt,credit report,credit score

According to the 2017 HMDA data, 30.3% of denied applications attributed 'debt-to-income ratio' as the primary reason for mortgage loan denial, up from 28.8% in 2016 and 28.2% in 2015. In fact, since 2015 it has become the number one reason that lenders have turned down purchase-mortgage applications.”

So today I wanted to take some time to explain what a DTI is as well as how to lower it.

In short, your debt-to-income ratio is all your monthly debt payments divided by your gross monthly income.

The concept of calculating your DTI is pretty easy – we add up what your total monthly debt like car payments, student loans, credit card minimum payments, etc as well as the proposed new housing payment and divide it by your gross monthly income (how much money you earn before taxes).

Sounds so simple, right? Not so fast. Like most things in the mortgage industry, there are many different moving parts that can make this tricky. Below are just a few examples:

Example #1: Every loan program has different guidelines on HOW they may calculate the monthly payment for a certain debt. Most commonly how they calculate student loan payments (even if you have a set monthly payment), open ended accounts (think American Express), installment debt with less than 10 payments-- the list goes on. This is where an inexperienced loan officer's royally screw up.

Example #2: Change of circumstance. (People in the industry will appreciate this play on words). This can come into play in various ways. This is mostly seen on borrowers that get prequalified MONTHS in advance. An unexpected decline in year-to-date income such as commission, bonus or sometimes even self-employed can cause the DTI to increase. Interest rates may rise causing the DTI to increase. For these reason alone, most lenders will not completely max out your debt ratio when they prequalify you. We leave a bit of a cushion for something that could turn up like higher than average monthly HOA dues, higher than average property taxes, etc. This example is more on the rare side but something that the loan officer should be taken into consideration when prequalifying a buyer and giving the green light on a max purchase price.

Though it is not required to get prequalified, I always send a list of documents to potential buyers which will eventually be needed for the processing of the file. In turn, this allows me to get very specific on your debt ratios as well as makes the actual loan process so much easier once a property is found! I review things like your tax returns, pay stubs, and any other documents directly related to your financial situation so I can tell you exactly how much you are qualified to borrow.

Lowering your DTI

You knew there was going to be gotcha right? Well, the truth is that I would not recommend someone go out and payoff debt to lower their DTI without talking to a mortgage professional.

WHY?!

Because of Example #1 listed above.

Say you have $5000 to payoff debt with and you have a $5000 credit card with a payment of $150/mo and an auto loan with a payment of $500/mo. The initial thought of most people would be to payoff the auto loan because the payment is higher BUT in some cases, because there are 10 payments or less remaining on the auto loan, we might not be counting that payment against you to begin with and you just used all of your available money on something that did not help you at all with your debt ratio. I review all opportunity costs of what funds are available to maximize the individual goals of the borrower. True story.

If you have any questions about debt ratios in general or want to review your own debt ratio, reach out! I hope you found this useful and please pass along to anyone you know that might find the information beneficial!

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