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Debt-to-Income Ratio for a Mortgage

Debt-to-Income Ratio for a Mortgage

  • Debt-to-Income Ratio for a Mortgage
  • All mortgage lenders use mortgage qualification guidelines to evaluate a borrower's mortgage application. These guidelines provide lenders with a set of rules to determine how much money they are willing to lend you. One of the most important guidelines applies a maximum debt-to-income ratio to determine what size mortgage you qualify for. Your debt-to-income ratio represents the ratio of how much you spend on monthly debt payments including your total monthly housing expense and debt expenses to your monthly income.  In short, the debt-to-income ratio for a mortgage determines how much of your gross income you can spend on your monthly mortgage payment which in turn determines what size loan you can afford. 

    Total monthly housing expense includes your monthly mortgage payment, property tax, homeowners insurance as well as other potential housing-related expenses such as private mortgage insurance (PMI), FHA mortgage insurance premium (MIP) and homeowners association (HOA) dues, if applicable.  Other monthly debt expense includes payments for credit card, auto and student loans as well as alimony, spousal or child support payments, if applicable.  The debt-to-income ratios are based on a borrower's gross income, so how much money you earn before any deductions.  Lenders typically apply a maximum debt-to-income ratio of 43% to 50% depending on the lender, loan program and other borrower qualification factors such as your credit score and down payment.

  • Great Mortgage IdeaThe debt-to-income ratio for a mortgage guideline is not set in stone, but provides a framework for lenders to determine what size mortgage you qualify for
  • We should highlight that your debt-to-income ratio is based on your monthly gross income, or income before any deductions such as taxes, social security, medicare and retirement account contributions. Additionally, the debt component for your debt-to-income ratio is based on your monthly debt payments, and not your total debt balance. For example, if you make a $150 monthly payment on a $20,000 student loan, $150 is included in the debt figure used to calculate your debt-to-income ratio and not the $20,000 loan balance.

    Please note that some lenders include an estimated figure for monthly payments on revolving debt accounts such as credit cards, even if your account balance is zero. For example, if you pay off your entire credit card balance every month, your account balance is zero which means that you will incur no ongoing monthly payments for the credit card, so technically your monthly debt payment figure for the credit card for the purpose of calculating your debt-to-income ratio should be $0. Some lenders, however, use an estimated monthly debt payment figure for the credit card even if the account balance is zero, especially if you incur charges and then pay-off your credit card bill every month. Be sure to ask your lender how they treat credit card and other debt with a zero balance that you pay-off every month.

    Additionally, the monthly payments on amortizing loans such as car and student loans with less than six months remaining on the loan term are typically not included in the debt-to-income ratio for a mortgage.  This is because you are close to paying off the loan completely and your monthly payments will terminate soon after your mortgage closes.  Borrowers should consult their lender to determine how amortizing debt with a near-term pay-off date is treated when calculating your debt-to-income ratio. 

  • Student Loans and Mortgage Debt-to-Income Ratio
  • For borrowers with student loans, lenders use the actual monthly loan payment you are currently making to calculate your debt-to-income ratio.  That may seem simple enough but there has been significant confusion on this topic, especially for borrowers on income-driven student loan repayment plans who make lower monthly payments than initially required by their loan terms.  Because income-driven student loan payments are based on a borrower's discretionary income, they are typically much lower than the standard monthly payment originally required by the loan and some borrowers are not required to may any payment at all.  According to lender guidelines, as long as the borrower provides documentation to verify the lower monthly payment and as long as the lower payment is the result of an income-driven repayment plan, then the lender can use the lower payment figure to calculate the borrower's debt-to-income ratio.  Using the lower, actual student loan payment figure improves your debt-to-income ratio and enables you to qualify for a higher mortgage amount. 

  • Your Debt-to-Income Ratio and What Size Mortgage You Can Afford
  • The size of mortgage you qualify for is directly impacted by your debt-to-income ratio.  The higher the percentage of your monthly gross income that you can afford to spend on your mortgage payment and total monthly housing expense, the larger the mortgage you can qualify for.  Additionally, the lower your non-housing monthly debt expense such as credit card and auto loans, the larger the mortgage you can afford because spending less on monthly debt expenses means you can spend more on your mortgage payment.

  • CalculatorUse our MORTGAGE QUALIFICATION CALCULATOR to determine what size mortgage you qualify for based on your debt-to-income ratio and current mortgage rates 
  • In addition to your debt-to-income ratio, what size mortgage you can afford depends on your mortgage rate, mortgage program and the length of your loan. The lower your mortgage rate, the larger the mortgage you can afford because your interest expense is lower. The mortgage program you select also impacts what size mortgage you can afford. An adjustable rate mortgage (ARM) or interest only mortgage typically enable you to afford a larger loan amount than a fixed rate mortgage because your initial interest rate and monthly mortgage payment are lower. It is important to highlight that your mortgage rate and monthly payment can change and potentially increase with an ARM or interest only mortgage so you need to make sure that you can afford the mortgage and payment over the duration of the mortgage. The length of your loan, or mortgage term, also determines what size mortgage you can afford. Longer term loans, such as a 30 year mortgage, enable borrowers to afford a larger mortgage because the monthly payment is lower than for a loan with a shorter term, such as 15 year mortgage.

    Lenders consider multiple factors in addition to your debt-to-income ratio in evaluating a borrower's ability to qualify for a loan including credit score, employment history, down payment and loan program.  Lenders also analyze your financial profile to make sure that you have the ability to repay the mortgage you are applying for using the government's Qualified Mortgage (QM) Guidelines.  The guidelines are designed to ensure that borrowers obtain mortgages that they can afford and pay back over time.  The Qualified Mortgage guidelines cover items such as a borrower's debt-to-income ratio, maximum mortgage term (30 years) and key loan features (balloon payments and negative amortization when your mortgage balance increases over time are prohibited).

  • Example of the Debt-to-Income Ratio for a Mortgage
  • In the example below we look at a borrower that makes $6,250 in monthly gross income and has $400 in other non-housing monthly debt expenses.  In the example, we apply a 50% debt-to-income ratio to determine what size loan the borrower can afford.  The example shows a higher debt-to-income ratio for a mortgage but it is important to highlight that lenders have some discretion over what ratio they apply and certain loan programs apply higher or lower ratios.  Borrowers should work with their lender upfront to understand the debt-to-income ratio the lender uses as well as the inputs that go into calculating the ratio, especially as it relates to your monthly debt payments.

  • Application of Debt-to-Income Ratio Results
    50% Debt-to-Income Ratio 50% of the borrower's monthly gross income equals $3,125
    • 50% * $6,250 in monthly gross income (debt-to-income ratio) = $3,125 in total monthly debt payments including monthly housing expense and non-housing debt payments
    • $3,125 - $400 in non-housing monthly debt payments = $2,725 in total monthly housing expense
    • $2,725 - $560 in property tax and insurance = $2,165 monthly mortgage payment
    Mortgage Size
    Mortgage affordability
    • Using a 50% debt-to-income ratio, the borrower should spend $2,725 on total monthly housing expense and $2,165 on a monthly mortgage payment
    • Based on a 30 year fixed rate mortgage with a 3.750% interest rate, the borrower can afford a mortgage of $467,000
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    Points  More Info:
    Points: Fees you are willing to pay in order to get a lower interest rate. The number of points refers to the percentage of the loan amount that you would pay. For example, "2 points" means a charge of 2% of the loan amount.
     
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    Monthly Housing Payments
    P & I More Info
    Principal & Interest: A periodic payment, usually paid monthly, that includes the interest charges for the period plus an amount applied to the reduction of the principal balance.
    Mortgage Insurance More Info
    Mortgage Insurance: The monthly cost for a policy that protects the lender in case you’re unable to repay the full amount of the loan. It is typically required for loans that have a loan-to-value ratio between 80% to 100%.
    (Estimated)
    Property Tax More Info
    Property Tax: (Also called "Real Estate Tax.") Property taxes are government assessments on real estate property. With mortgage financing, the local, county or state tax assessment on real estate property is considered part of the monthly housing obligation and typically collected and set aside by the lender ...
    (Estimated)
    Homeowner Insurance More Info
    Homeowner Insurance: or also commonly called hazard insurance, is the type of property insurance that covers private homes. It is an insurance policy that combines various personal insurance protections, which can include losses occurring to one’s home, its contents, loss of its use, or loss of other personal possessions of the homeowner, as well as liability insurance for accidents that may happen at the home or at the hands of the homeowner within the policy territory.lender ...
    (Estimated)
    Homeowner Association Fee More Info
    Homeowner Association fee: (HOA) fees are funds that are collected from homeowners in a condominium complex to obtain the income needed to pay (typically) for master insurance, exterior and interior (as appropriate) maintenance, landscaping, water, sewer, and garbage costs.
    (If Any)
    Total Monthly Housing Payments
    Lender Fees
    Points More Info
    Points Fees you are willing to pay in order to get a lower interest rate. The number of points refers to the percentage of the loan amount that you would pay. For example, "2 points" means a charge of 2% of the loan amount.
    Origination Fee More Info
    Origination Charge: A loan origination charge is a fee charged by the lender for evaluating, processing, and closing the loan.
    Credit Report Fee More Info
    Credit Report Fee: Fee charged to obtain an applicant’s credit history prepared by one or all of the three major credit bureaus. Used by lender to determine the borrower’s creditworthiness.
    Tax Service Fee More Info
    Tax Service Fee: A fee charged by the lender to cover the cost of retaining a tax service agency. These agencies monitor the property tax payments on the property and report the results to the lender.
    Processing Fee More Info
    Processing Fee: A processing fee is a charge by the lender for clerical items associated with the loan. Examples of processing include loan set up, organization of loan conditions for underwriting, and preparing required disclosures for the borrower.
    Underwriting Fee More Info
    Underwriting Fee: A fee charged by the lender to verify information on the loan application, authenticate the property’s value, and perform a risk analysis on the overall loan package.
    Wire Transfer Fee More Info
    Wire Transfer Fee: In most cases lenders wire funds to escrow companies to fund a loan. Commercial banks that perform this function will charge the lender so the fee is generally passed on to the borrower.
    (If Any)
    FHA Upfront Premium More Info
    FHA Upfront Premium: A fee paid in cash at the close of escrow or more commonly it is financed into the loan. These premiums are pooled together by the FHA and are used to insure the risk of borrower default on FHA loans. FHA upfront premiums are prorated over a five year period, meaning should the homeowner refinance or sell during the first five years of the loan, they are entitled to a partial refund of the FHA upfront premium paid at loan inception.
    (If any)
    VA funding Fee (If any)
    Flood Fee
    Other Fees More Info

    Other fees could be either additional Administrative Fees that a lender charges or it could be a Flat Fee to cover all lender charges such as: (Origination Fees, Points, Underwriting and Processing Fees, Credit Reports and Tax Service Fees)

    The flat fee does not include prepaid items and third party costs such as appraisal fees, recording fees, prepaid interest, property & transfer taxes, homeowners insurance, borrower’s attorney’s fees, private mortgage insurance premiums (if applicable), survey costs, title insurance and related services.

    Total Lender Fees
    *Actual rates and other information may vary. Sponsored results shown only include participating lenders. The information you enter on this page will only be shared with lenders you choose to contact, either by calling the phone number or requesting a quote.
    Current Mortgage Rates as of November 21, 2018
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    Data provided by Informa Research Services. Payments do not include amounts for taxes and insurance premiums. The actual payment obligation will be greater if taxes and insurance are included. Click here for more information on rates and product details.
  • Sources

    Conventional Loan Debt-to-Income Ratio: https://www.fanniemae.com/content/guide/selling/b3/6/02.html

    FHA Mortgage Debt-to-Income Ratio: https://www.hud.gov/sites/documents/14-02ML.PDF

    VA Home Loan Debt-to-Income Ratio: https://www.benefits.va.gov/WARMS/docs/admin26/pamphlet/pam26_7/ch04.pdf

    USDA Home Loan Debt-to-Income Ratio: https://www.rd.usda.gov/files/3555-1chapter11.pdf

About the author

Harry Jensen, Mortgage Expert

Harry is the co-founder of FREEandCLEAR. He is a mortgage expert with over 45 years of industry experience. Over his career, Harry has closed thousands of loans for satisfied borrowers and now offers his advice and insights on FREEandCLEAR. More about Harry

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