Course 1 – Unit 2: Factors In Mortgage Lender’s Formula

The Debt To Income Ratio Formula 

This is how the Debt-to-Income Formula works:

Step 1: The debt-to-income ratio  (DTI FORMULA) is simple math calculation.  The total monthly debt payments  (those on the credit report, plus the new estimated monthly mortgage payment) is divided by the borrower’s combined monthly gross income. The resulting number cannot exceed 45%  for a conventional mortgage loan, and cannot exceed 50% for a FHA mortgage loan product.

A. If you are a salaried or hourly employee, your gross monthly income is taken from the previous W-2, or from the current gross income documented by your year to date paystub. Lenders will also order a VOE, (verification of income) from your current employer to validate your current income.
B. If you are self employed, or a 1099 employee (contract employee), your income is taken from your filed tax returns.
( see self employed borrower course to determine your qualifying income details)

Step 2:  All monthly payments found on your current credit report are totaled and called qualifying liabilities.

A. You will need a copy of your most current credit report that shows all open accounts and the minimum monthly payments for each open account.
B. Pull free copy of your credit report to secure your monthly payments www.annualcreditreport.com

Step 3: Total monthly payments are subtracted from the total qualifying income.

Step 4: The result is called qualifying mortgage payment. This is the maximum amount of your mortgage payment. This what you can afford and qualify for by lenders.

Step 5: Add all monthly payments from your credit report to your qualifying mortgage payment.

Step 6: Your total monthly income is divided by the total of all monthly payments. This is your maximum debt to income ratio (DTI)

Step 7: The vast majority of conventional loans enforce a maximum DTI of 45% of your gross monthly income
A. FHA Loans and VA Loans can use a maximum DTI of 50%
B. USDA mortgage loans can use a maximum DTI near 45%
C. Jumbo mortgages loans can use a maximum DTI of 40%.

Here is a Complete list of Factors of  Homeownership Costs.

Income, Liabilities, Down Payment Source, Cash on Hand Checking/ Savings / Retirement Acct / Gift Funds, Qualifying Interest Rate (based on credit score), Length Of Loan (30 yr, 15 yr, etc), Property Insurance Payment, Property Tax, Mortgage Insurance, HOA Dues (if condo or townhome)