Debt To Income Ratio and How It Affects Your Mortgage

The debt to income ratio is your monthly re-occurring bills like auto-loans and credit cards. LBC Mortgage uses the debt to income ratio to determine the amount of loan you qualify for. You can calculate your total DTI by taking your total monthly expenses and dividing it by your gross monthly income before taxes.

You can also use the home affordability calculator to see the house that you may afford. This calculator takes into account your DTI ratio, including homeowners insurance, property taxes, and mortgage insurance.

Maximum DTI Ratio For Home Loans

Your debt-to-income ratio will most likely determine the amount you qualify for a home loan. If you have a lower debt-to-income-ratio, it means that you are probably going to default on payments.Those with high DTI may get a mortgage based on different compensation factors such as High income (over $100,000 in a year), an excellent credit score (700+), and extra cash reserves.

The Types of DTI used by lenders

There are two main types of DTI ratio used by most lenders, and they include;

The back-end ratio

The back-end DTI ratio takes into account your current debt-to-income ratio,including your estimated mortgage payments. This ratio isn’t supposed to be more than 43% or higher than 50%, although the recommended DTI ratio should be 36%.

The Front End Ratio

The front end ratio is your debt to income rate, which doesn’t include estimated mortgage payments. The maximum front end ratio allowed by most lenders is 28%, but ideally, it should be 23%.

Ways To Lower Your DTI Before Getting Approved For A Home Loan

If your DTI is more than 36%, you need to take measures to lower it. First, if your credit card has a high balance, you need to work on paying it down. This will not only increase your credit score, but it lowers your minimum payments.

Higher credit scores mean that you can easily get lower rates, and this makes you look less of a risk to any potential lender. So, you increase your chances of getting approved. You can also consider visiting local stated income loans office to reduce the hassles involved in the process.

A stated income loan is a self-employed home loans company where a borrower doesn’t verify their income by pay stubs or tax returns, but by stating their monthly income on a mortgage application. This arrangement was initially designed for self-employed individuals with complicated tax schedules, but it’s now widespread.If you already own a rental property, it’s possible to refinance the property and pull out cash to pay your debt. Mostly, investment property owners sit on properties that they owe little mortgage. For such borrowers, a stated income loan is an excellent way to lower or pay off their monthly expense.

One of the recent additions to the stated home loans program is that investment property owners have a way to refinance without verifying through a 4506T or proving income on tax returns. This way, landlords can obtain cash-out refinance to pay for renovations and repairs to the rental properties.

Nancy Smith is an entrepreneur and a writer.