January 23, 2019
Debt-to-Income (DTI) Ratio: What it is and How it May Affect You
When it comes to obtaining a loan for the purpose of purchasing a property, a lender naturally needs ways by which to weed out those potential debtors who might pose an unusually high risk. A borrower must be able to make their monthly mortgage payments. Among the methods lenders use to figure out the readiness of a borrower to take on such a burden is by calculating the potential borrower’s Debt-to-Income (DTI) Ratio.
Put simply, a person’s DTI Ratio is calculated by adding together all of their monthly debt payments, then dividing them by their gross monthly income (which is the amount they earn before the removal of taxes and other deductions).
Let’s say a borrower pays $1200 per month for their mortgage, $250 per month for their auto loan, and $600 per month for the rest of their debts (credit card payments and so forth). That comes to $2050. If the borrower’s gross monthly income is $5000, then their DTI Ratio is 41%.
People who have a higher DTI Ratio tend to be most prone to having trouble making their monthly mortgage payment.
Generally, if a borrower’s DTI Ratio exceeds 43%, they will not be meet the ability-to-pay classification, which means they will not be permitted to take out a Qualified Mortgage—a category of loan possessing certain features that are focused on making the loan stable. (For example, a Qualified Mortgage cannot possess risky provisions, like: an interest-only payment period; balloon payments; or negative amortization, a situation in which a loan’s principal increases over time even despite on-time payments.) This is particularly true if the lender is a larger institution—some exceptions apply wherein small creditors (who do less than $2 billion per year of business and have made fewer than 500 loans in the previous year) are permitted to loan via Qualified Mortgages to borrowers whose DTI Ratio exceeds 43%. But even in the case one finds a small creditor willing to make such a loan, it isn’t really something that’s advisable in most cases. A high DTI Ratio can really put a household on the ropes, leaving very little in the way of flexibility should any sort of financial hardship occur. Generally one should not get a mortgage unless their DTI Ratio is 36% or lower, with only about 28% of that amount allocated to payment of the mortgage itself.
At Topouzis & Associates, P.C., we offer the services that ensure your title gets conveyed clear of defects, and we supply purchasers with Owner’s Policies of title insurance. Contact us if you want your Qualified Mortgage property transfer in Cranston, Rhode Island; Springfield, Massachusetts; or Panama City, Florida to go through without a hitch—both before and after closing.