Does the lender use your current rent payment or your future mortgage payment to determine your debt-to-income ratio when you apply for a mortgage?
When you apply for a mortgage, the lender uses your total monthly housing expense including your anticipated mortgage payment, property tax, homeowners insurance as well as mortgage insurance and homeowners association (HOA) dues, if applicable, to determine your debt-to-income ratio. Your current rent payment is not included in your debt-to-income ratio and does not directly impact the mortgage you qualify for.
For example, if you are currently renting a home for $2,000 per month and you buy a home with projected total monthly housing expense of $1,600 then the lender uses the $1,600 figure to calculate your debt-to-income ratio, not your $2,000 rent payment. The lender assumes that you will move out of the house you are renting and stop paying rent so that figure is not relevant to your mortgage application.
This means that if your current debt-to-income ratio is high -- above 50% -- because of a high monthly rent payment, you are not penalized when you apply for a mortgage. Lenders usually verify that you have made your rent payments on time but the actual amount of rent you pay is less of a factor than the total monthly housing expense you will pay when your mortgage closes and you move into your new home.
The debt-to-income ratio for a mortgage typically ranges from 43% to 50%, depending on the lender and the loan program. The higher the debt-to-income ratio used by the lender, the higher the mortgage amount you qualify for. In some cases lenders apply higher debt-to-income ratios for applicants with stronger financial profiles including applicants with higher credit scores, significant financial reserves or if you make a larger down payment.
Debt-to-income ratios vary by lender and other factors. We recommend that you contact multiple lenders in the table below to understand the ratio they use and to determine the mortgage you qualify for. Shopping lenders is also the best way to save money on your mortgage.
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Your debt-to-income ratio represents the maximum amount of your total monthly gross income you can spend on debt payments included your total monthly housing expense and other debts such as credit cards as well as car, student and personal loans. For example, if you make $5,000 in monthly gross income and the lender applies a 50% debt-to-income ratio, you can spend $2,500 on total debt payments, including your mortgage.
The less non-housing related debt expense you have, the more you can spend on your mortgage payment and total monthly housing expense. Using the example above, if you have $750 in credit card and student loan payments, you can spend $1,750 on total housing expense. If you only have $250 in non-housing debt payments, you spend $2,250 on total housing expense, which means you qualify for a higher mortgage amount.
Review What is the Debt-to-Income Ratio for a Mortgage?
In short, lenders subtract your personal debt expenses from the amount you can spend on total debt and the remaining amount is what you can spend on housing expense. As illustrated by the example below, the lender uses this figure to determine the loan you can afford based on current mortgage rates and the length of your loan. This example assumes a 30 year fixed rate loan with a 4.000% mortgage rate.
Monthly Gross Income: $5,000
Debt-to-Income Ratio: 50%
Amount Borrower Can Spend on Total Debt: $2,500
Monthly Personal Debt Expense: $500
Amount Borrower Can Spend on Total Monthly Housing Expense: $2,000
Mortgage Borrower Qualifies For: $333,000
If the lender uses a lower debt-to-income ratio or if the borrower has higher personal debt expense, the mortgage amount she or he can afford is lower. Factors such as property tax rates and your mortgage program also affect what size loan you qualify for.
Use ourDEBT-TO-INCOME RATIO CALCULATORto determine the mortgage you can afford
To summarize, when you apply for a mortgage, your debt-to-income ratio is calculated based on your projected total monthly housing expense for the home you buy as opposed to the rent or mortgage payment for the home you currently live in. Mortgage lenders apply a specific debt-to-income ratio to determine your ability to qualify for a loan as compared to landlords that may use more flexible qualification guidelines.
A high debt-to-income ratio caused by a high monthly rent payment should not prevent you from qualifying for a mortgage. Plus, you may be able to lower your debt-to-income ratio if the total monthly housing expense for the home you buy is lower than you current rent.
Sources
"B3-6-02, Debt-to-Income Ratios." Selling Guide: Fannie Mae Single Family. Fannie Mae, February 5 2020. Web.
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