Gene Mundt does a great job here explaining the mechanics of the debt-to-income (DTI) ratio calculation. This number has become more important than it has been in the past because the lenders are very concerned with your ability to repay. Gone are the days of getting approved simply because of substantial equity in the property and good credit score!
The ABC's of DTI's (Debt-to-Income Ratios)
Definition of Debt-to-Income Ratio: The figure that represents how much of your income is spent repaying your recurring monthly debts. The HIGHER your Debt-to-Income Ratio is, the more of your monthly income is being devoted to paying back your debts.
Formula Used to Find Your Debt-to-Income Ratio: Monthly debts owed divided by monthly income. This includes utilizing ALL Recurring Monthly Debt VS Gross Monthly Income, as determined ultimately by an Underwriter at Final Approval.
Those clients I speak to regarding Mortgage Pre-Qualifications and Mortgage Applications typically are hyper-focused on 2 factors involved in their Mortgage financing: The Downpayment they need to make ... and their Credit Scores/Credit Report.
While those factors are definitely important, there are two additional factors that I often see overlooked. Those are:
- Debt-to-Income Ratio
- Property Taxes
My findings are backed-up by those in a new survey provided by FICO. This survey reveals that Debt-to-Income Ratios are the #1 factor contributing to denial for loan. 60% of credit-risk managers surveyed by FICO considered Debt-to-Income Ratios as their #1 concern.
Debt-to-Income Ratios represent an excellent example of WHY I encourage all hopeful Chicago-area homebuyers to contact me (a Mortgage Lender) well in advance of the time they hope to purchase. If given time to do so, I can help my borrowers successfully improve (Lower) their DTI ratios.
It's important to know: Even small improvements can mean the difference between loan denial and a successful Approval.
Here are the ABC's of DTIs:
Defining "acceptable" can be somewhat hard these days, but typically, with the implementation of the new "Ability to Repay and Qualified Mortgage Rule" on January 10, 2014, acceptable ratios are defined: As high as *43%.
* Now that said, currently there are exceptions to this Rule. Exceptions that allow for up to 45% DTIs, as well as up to 50% +/- on FHA Loans. Final determinations of "acceptability" are made on a case-by-case basis, land can be impacted by the other layers of risk (down payment, credit scores, job history, reserves).
All this talk of "acceptability" and "exceptions-to-the-rule" leads me to always advise that:
Anyone hoping to buy a Chicago-area home contact me, sooner than later. That way, if improvements are needed to your Debt-to-Income Ratio or credit, etc., we can address those issues together and make improvements as quickly as possible.
The other factor I see contributing to loan denials surrounds Property Taxes. In fact, for my borrowers, it's the reason I see come into play most often.
As a result, even in preliminary conversations with my clients, the following questions are always included:
- Do you already have a specific property in mind for purchase?
- What are Property Taxes for that home?
- Are their Assessments involved?
- Does the property have HOA fees?
In short, if your DTIs are close to being maxed-out, the Property Taxes on the home you're considering for purchase can cause you to exceed Debt-to-Income Ratios. That's not good.
When this happens, my borrowers typically choose to resolve the issue by starting another property search. This time they consider only those homes with lower property taxes, no/lower Assessments, or no HOA fees. In other words, the homes they can qualify for.
For those hoping to buy in the Chicago-area, the process can seem a bit daunting. It shouldn't ... and it doesn't have to be. Debt-to-Income Ratios can be addressed properly UPFRONT, with the right guidance and time.
Find me, your Chicago-area Mortgage Lender, as soon as you make the decision to buy a home. We'll have an in-depth conversation regarding your ability to finance and how you can accomplish your goals. Follow my advice and you'll successfully purchase the home you love much sooner ...
* Hoping to Buy, Construct, or Refinance a home in Joliet, Will County, or elsewhere in the Chicago-area? Contact Me now! I'll put my 37 years of Mortgage experience and expertise hard to work on your behalf.
I can be easily found at:Direct: 815.524.2280Cell/Text: 708.921.6331eFax: 815.524.2281Click HERE for your FREE Mortgage Consultation!
Regional Manager - Mortgage Lender
American Portfolio Mortgage Corp.
Personal NMLS #216987
NMLS # 175656
Gene Mundt, Mortgage Lender, a Lender with 36 years of #mortgage experience, will offer you exemplary mortgage service and advice when seeking: #Conventional, #FHA, #VA, #Jumbo, #USDA, and Portfolio Loans in #Chicago and the greater Chicagoland region, including: The #Lincoln-Way Area, #Will County, (#New Lenox, #Frankfort, #Mokena, #Manhattan, #Joliet, #Shorewood, #Crest Hill, #Plainfield, #Bolingbrook, #Romeoville, #Naperville, #Wilmington, #Peotone, etc.), #DuPage County, the City of Chicago, #Cook County, and elsewhere within IL. Gene Mundt, Mortgage Lender can be contacted at:
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Phil Caulfield NMLS #386911 APMC #1850 has been helping people obtain mortgages since 1985. The views, articles, postings, and information listed at this website are personal and do not necessarily represent the opinion or the position of American Pacific Mortgage Corporation."