If you’ve ever even considered purchasing a home, you’ve probably seen a number of lending acronyms: LTV, FHA, ARM, FICO, APR, PITI, TIL, TRID, DTI…the list goes on and on. While some of these only come into play once you’ve applied for lending, one term that is important to know, and it’s impact on your pre-approval for a home loan is DTI. DTI, or Debt to Income, is comprised of 3 factors; Your gross monthly income, the monthly amount you already owe, and your suggested mortgage payment, which includes escrow for taxes and insurance.
Monthly debt, or your ‘back end ratio’, is anything you are obligated to pay long term including, but not limited to, car payments, credit card minimums, alimony, and student/personal loans. If you’re wondering what payments you are currently making that impact this number, the best way to get this total is off your credit report, which is also where your lender will pull them from. Fortunately, monthly bills like utilities and groceries are not included because they fluctuate every month. For most conventional loans, your DTI is expected to be around 43% but can be up to 50+% if you have other strong compensating factors like high credit and lots of cash reserves. One of the reasons it’s important to interview lenders before choosing one is because while they all have the same overall requirements for granting a loan, they have different allowances they might offer which can help you qualify, including DTI percentages.
To give you an idea of what this looks like, let’s say you want to attain a mortgage for $300,000. You plan on putting $30K, or 10% down, so you are asking to borrow $270,000. If you get a loan for this amount at 4%, your mortgage payment will be $1289. Because your lender will be on the hook for your property until you pay it off, they pay your home insurance and taxes on your behalf, and work those numbers into your monthly mortgage payment. These 2 additional payments are called ‘Escrow.’ If, for example, you have a home owner’s insurance policy which costs $1200/yr, that will add an additional $100 to your mortgage payments. The tax rate for the county you are expecting to move to can be found if you Google your county name and state. FYI, your house taxes are actually based on your Assessed Home Value, not the price you pay for your home. (This is the one instance that you want your home value to be low!) For arguments sake, let’s say the home you want to buy is assessed at $300K. In Denver county, you’ll pay $1872/yr in taxes, or an additional $156/mo. In Arapahoe county, your taxes will be $2112, or $176/mo, so the old real estate adage, ‘location, location, location!’ applies here too.
If this purchase took place in Denver, then, your total suggested mortgage payment would be approximately $1545 for mortgage and escrow. If you have a monthly car payment of $300, a credit card with a minimum monthly payment of $75, and a student loan repayment amount of $100 a month, totaling $475 in bills, or $2020 total, you would need $4700/mo gross income, or $56,400 a year to be at 43%DTI. To be at 50% DTI would need $4040/mo gross income. Although you might make enough salary to qualify for this loan scenario, keep in mind that these numbers don’t take into consideration whatever amount is coming out of your paycheck beforehand for taxes. So if you want to be able to pay for other home/life amenities like water, utilities and groceries, you need to take that into consideration when searching for your new home.
Obviously there are THOUSANDS of DTI scenarios, so if you want to look at your lending numbers specifically, a great source to calculate your DTI is this affordability calculator. If you have follow up questions about DTI, or any lending questions, we suggest you contact our lending partner, Scott Lagge at Eagle Home Loans, firstname.lastname@example.org, (303) 944-8552 and speak directly with him for accurate answers. We have been working with them for over 4 years, and have found them to be an invaluable source of information and assistance. If you know you’re ready to house hunt and start the process NOW, you can go here, and start the process online. This usually takes around 30 minutes, and will give you the quickest answer on what you will be able to qualify for.
Although the house hunting process, (and specifically applying for lending to start the house hunting process,) can be daunting, preparing yourself on what to expect, and educating yourself on the steps along the way will certainly make it all less stressful. If you have any follow up questions to this blog, we are always happy to help and assist in anyway we can because an educated home seeker is much more likely to be a successful home buyer.