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Health & Fitness

How Big of a Mortgage Can I Afford? Understanding the Formula

An explanation on DTI = Debt to Income ratio. When trying to qualify for a mortgage you will need to know this.

My guest blogger today is our in-house Mortgage Banker Jorge Rivera.  Jorge attends our team meeting every Friday morning and shares with us current topics in the mortgage world.  A couple of weeks ago Jorge explained the DTI – Debt to Income ratio that banks currently use before lending money for a mortgage.  I hope you find his explanation here as helpful as we did.

 

 

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Debt to Income Ratio Calculations

 

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The world loves acronyms and the mortgage industry falls right in step.  One of the more important ones is D.T.I. which stands for debt to income ratios.  This is a calculation that represents what percentage of a borrower’s gross pay (calculated per underwriting guidelines) is needed to cover the mortgage payment and other liabilities.  The lending world used to break debt to income ratios into a “front” and “back”.  (Some banks still do, but for the most part we just focus on the back end ratio these days.)  The front is the percentage of income needed to cover the mortgage payment and the back is the percentage of income needed to cover the mortgage payment and all other monthly liabilities combined.  (It is important to note that we do not include payments that do not appear on the credit report….also important to note that pretty much every statement has an exception….alimony and child support, and other payments reflected on the pay stub, etc. are included….but I am trying to represent that most utility bills, insurance payments, etc. are not.)

 

The income side of equation is fairly simple to calculate for a salaried borrower.  We take the annual salary and divide this by 12.  It gets trickier from there.  We typically need a form called a verification of employment from a human resource department to help calculate income for hourly wage earners, bonus, and/or commission.  Part-time income is allowable if a borrower has been working for the same employer for more than two years.  We use a two year average if the most recent year is more than the previous.  If the current year is lower, we can only use a 12 month average (assuming the decrease is not so substantial that underwriting may be leery of using any amount.)  Underwriting guidelines may also not allow the usage of an average in applications that include a recent change in employment.  (Again, there are possible exceptions to everything.)

 

Self-employed borrowers could be a separate, expansive post, but similarly, we use a two year average of the income number represented on the tax return.  Other types of income that can be used include social security and pensions, alimony and child support, and dividend and retirement distributions.

 

We will go through the liability side of the equation in our next post…

 

 

Jorge Luis Rivera, III

Executive Mortgage Banker

William Raveis Mortgage, LLC

7 Trap Falls Road

Shelton, CT 06484

 

203.913.1633 cell

203.682.4354 fax

 

Click here to learn more about Jorge!

Click here to start the mortgage application process!

 

 

 

NMLS Mortgage Loan Originator ID #12303

 

 

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This post is brought to you by Renee Daley, your real estate expert in Fairfield and Southport Connecticut.  Please contact me if I can help you with any of your real estate needs.

 

 

 

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