How to accurately caluclate your Debt-to-Income Ratio (DTI)

How Debt to Income ratio can affect your mortgage qualifications

By Kevin Nichols, Published 4/14/2022

Debt to Income Ratio (DTI)

This calculation compares your monthly debt obligations (mortgage, car payments, etc.) with your monthly income (job, pension, business, etc.)

Monthly, monthly, monthly: that is the key word. Both Debt payments and Income are always calculated on a monthly basis for mortgage qualification.

The only debts counted in DTI are those which are reported to credit, like auto loans, student loans, personal loans, and credit cards. Any debt that is cancellable is not included, so you can exclude things like your utilities, phone bill, auto insurance, life insurance, health insurance, streaming services, etc…Now, you’re probably not going to cancel your phone bill, but you theoretically could.

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Credit Cards

Credit cards are the most common type of debt, and the easiest to work with when getting a home loan.

Let’s say you have a balance of $9,000 on your credit card(s), and a minimum monthly payment of $50. The $50 monthly payment is all that will be calculated in the DTI against your monthly income. I work with a lot of potential buyers that believe they have too much total debt to qualify for a home loan when in reality the hit to the DTI is actually pretty minuscule.

Now, if that same credit card(s) has a $10,000 credit limit on it, your credit scores are probably taking a small hit due to the utilization ratio being 90%. So try to keep those ratios around 30% or less! You can request a credit limit increase to bump the utilization ratio down a bit, but the point here is that the total balance won’t directly affect the DTI, but the credit score instead.

Installment Loans: Auto Loans, Personal Loans, Student Loans

What is an installment loan? An installment loan allows individuals to borrow a predetermined amount of money all at once, and repay the loan over a fixed number of payments. Different from a revolving line of credit (credit card) because the balance will only go down, whereas a credit card it’s constantly fluctuating. Just like with credit cards, it’s only the minimum monthly payment required that is calculated in the DTI.

So let’s say you have a $25,000 auto loan with a $400/mo payment, again, just the $375/mo payment is included in the monthly DTI. The term of the loan doesn’t matter, the interest rate on the loan doesn’t matter. All that matters is what you owe each and every month until the loan is paid off. The same thing applies to personal loans.

PRO TIP: Any installment loan with 10 payments or less remaining may be excluded from the DTI per Fannie Mac, Fannie Mae, and HUD Guidelines.

So if you’re looking to purchase a home, and your car payment is $400/mo and the balance of the auto loan is $4,800, you can pay that auto loan down to $4,000 and exclude it from the DTI, thus, qualifying for a significantly higher purchase price on the home. Any type of installment loan can be paid down to 10 payments remaining and be excluded from the DTI.

Student loans are an installment loan but they can be a little different. Oftentimes they are deferred, meaning there is no payment due on them until a future date. In this scenario, lenders will automatically default to 0.5% of the outstanding loan balance as the monthly payment because these are usually 30-year mortgages that we’re looking to qualify for, it’s assumed that the student loan payment phase will kick in sometime during the mortgage term. If the student loan is already in repayment phase, then just the regular monthly payment will be calculated in the DTI.

So if a deferred student loan has a balance of $50,000, then a $250 “hypothetical” monthly payment will be added to the DTI.

If you’d like to find out exactly what your debt-to-income ratio is for a certain home purchase price, or a few different home prices, just click here and we’d be happy to get you that information in a matter of minutes!

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Kevin Nichols

Mortgage Professional
NMLS#: 2083099
Call/Text: 619.333.0019

California’s Best Lenders brings the best of Wholesale Mortgage Lending to as many people as possible. I look forward to the chance to help you with your real estate finance needs so don’t hestiate to reach out.

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