I have had some of my Burlington County, New Jersey clients tell me that they have good credit, but can't get approved for a mortgage. Maybe they have too much credit or in other words, too much debt for their level of income. Below Ken Cook explains Debt To Income Ratio.
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Leander
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Sometimes the borrower(s) have great credit, good income and good assets but they still do not qualify for the best loan. How could this be? The answer is simple: they spend too much on credit!
First let me define for you Debt to Income Ratio: It is the ratio of debt to income. (Okay, sorry, could not resist.) Debt to Income Ratio (DTI) is expressed in percent. So a 20% DTI means the applicant spends 20% of their gross income on credit purchases every month. The debt is determined by the amount of monthly minimum payments shown on credit:
Mortgage $1500
Car 1 $400
Car 2 $320
Credit Card 1 $65 (minimum payments)
Credit Card 2 $30
School Loan $100
Personal Loan $80
Revolving Account $15Total debt $2510 per month
Total GROSS income $5500 per monthDebt / Income = DTI
2510 / 5500 = 45%This ratio is called the BACK ration. The FRONT ratio is housing expense only. Depending on what type of loan your client is getting usually only the BACK is going to present a "challenge". In the example we showed a DTI of 45 (how it would be said by the lender/loan officer) which is probably not going to be a "challenge".
Don't guess about DTI, ask the LO if they have run DO, DU, LP - whatever is being used for the underwriting engine - and if the DTI is acceptable. If it is not acceptable there are things that can be done to fix it.
Feel like asking your customer's boss of they can get a raise? No joke - been there, done it, got it, closed the loan. (But that's why you should call me - ha! I'm witty tonight.) Actually getting a raise can greatly offset the DTI even more than the "easier for you" tip of paying off some debt. Back to our example ...
Let's pay off that Revolving Account and Credit Card 2:
2465 / 5500 = 44.8 (we round UP so it's still 45)
Now let's get the borrower a $1.00 per hour raise or $160 per month:
2510 / 5660 = 44.3 (we round DOWN so it's 44)
Do both and:
2465 / 5660 = 43.5 so pay down Credit Card 1, rescore or repull and now you're in that magic 43 DTI range for FHA.
Once again, never guess on this and always see what the underwriting engine returns. A good processor/loan officer can make or break a loan on how the debt and income is structured in the submitted file.
Thanks for reading - please share. Want to know how to ask the employer for a raise? You have to call me :)
Ken Cook 866-946-0120 extension 101
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Novation Mortgage, 2501 E Piedmont Road, Suite 201, Marietta, GA 30062 Georgia Residential Mortgage Licensee 20014. Florida Mortgage Broker Business MBB 0703760 FHA Lender - Equal Housing Lender
Good explaination. I too find buyers thinking they are good to go and then don't understand why.
VERY GOOD EXPLANATION and probably one of the best I have ever heard. Thanks for taking the time to do this as I really think it will help a lot of people who don't understand what DTI is (YES EVEN SOME AGENTS TOO)!
This should be a featured post!
This is too funny we reblogged the same post