Chris Andaya
Aspiring homebuyers often look to mortgage loans to finance their purchase. One of the primary factors lenders consider when evaluating loan applications is the borrower’s debt-to-income ratio or DTI. DTI is the percentage of a borrower’s gross monthly income that goes toward paying debts. This blog post will discuss DTI as it pertains to qualifying for a home loan, the various DTI requirements for different mortgage products, and how non-taxed income can be grossed up by 25% to increase buying power.
Meet The Veteran Mortgage Team, a group of loan officers who are all US military veterans. The team specializes in helping veterans secure mortgage loans and navigating the complex process of homeownership. With their extensive knowledge and expertise, they assist clients in understanding the various mortgage products available to them and finding the right loan that fits their financial situation.
Debt-to-Income Ratio (DTI) Explained
DTI is a metric that compares the borrower’s monthly debt obligations to their gross monthly income. To calculate DTI, lenders add up all the borrower’s monthly debt payments, including credit card minimum payments, car payments, student loans, and any other monthly debt payments. They then divide this number by the borrower’s gross monthly income to get the DTI percentage.
For example, suppose a borrower has a monthly car payment of $300, a student loan payment of $200, and a credit card minimum payment of $100. If their gross monthly income is $4,000, their total monthly debt payments would be $600. Their DTI would be calculated by dividing $600 by $4,000, resulting in a DTI of 15%.
The lower the DTI, the better chance the borrower has of being approved for a loan. Lenders use DTI as an indicator of the borrower’s ability to repay the loan. The higher the DTI, the more of the borrower’s income is going toward debt payments, leaving less room for a mortgage payment.
DTI Requirements for Conventional Loans
Conventional loans are mortgage loans that are not guaranteed or insured by any government agency, such as the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA). Instead, they are backed by private lenders and investors.
The DTI requirements for conventional loans vary based on the borrower’s credit score and down payment amount. In general, a borrower with a credit score of 740 or higher and a down payment of at least 20% can have a DTI of up to 36%. For borrowers with a lower credit score or a smaller down payment, the DTI requirements may be stricter.
DTI Requirements for VA Loans
VA loans are mortgage loans guaranteed by the Department of Veterans Affairs. They are available to active-duty service members, veterans, and eligible surviving spouses. VA loans offer competitive interest rates and flexible DTI requirements.
The VA does not set a maximum DTI ratio, but most lenders require a DTI of 41% or lower. However, borrowers with compensating factors, such as a large down payment or significant cash reserves, may be approved with a higher DTI.
DTI Requirements for FHA Loans
FHA loans are mortgage loans insured by the Federal Housing Administration. They are available to all borrowers, including first-time homebuyers, with a minimum credit score of 580. FHA loans have more lenient credit and DTI requirements than conventional loans.
The maximum DTI ratio for an FHA loan is 43%, although lenders may approve borrowers with a higher DTI if they have compensating factors. The FHA also allows borrowers to include non-taxed income, such as disability benefits or social security payments, in their DTI calculation.
DTI Requirements for USDA Loans
USDA loans are mortgage loans guaranteed by the United States
Department of Agriculture. They are available to borrowers in rural and suburban areas who meet income and property eligibility requirements. USDA loans have flexible credit and DTI requirements.
The maximum DTI ratio for a USDA loan is 41%, although lenders may approve borrowers with a higher DTI if they have compensating factors. USDA loans also allow borrowers to include non-taxed income, such as disability benefits or social security payments, in their DTI calculation.
Calculation of DTI and Inclusion of Debts
To calculate DTI, lenders consider a borrower’s gross monthly income, which includes their total income before taxes and other deductions. This may include income from their job, bonuses, commissions, and any other sources of income.
In addition to debts like credit card payments, car payments, and student loans, lenders may also consider other recurring monthly expenses, such as child support payments, alimony payments, and other obligations that impact the borrower’s monthly budget.
To calculate a borrower’s DTI, lenders may also consider their proposed monthly mortgage payment. This includes the principal, interest, taxes, and insurance (PITI) payment, as well as any homeowner association (HOA) fees, mortgage insurance premiums (MIP), and other recurring expenses related to homeownership.
Grossing Up Non-Taxed Income
One of the unique features of certain mortgage products, such as FHA and USDA loans, is the ability to gross up non-taxed income. Grossing up non-taxed income means increasing the amount of income considered by the lender when calculating the borrower’s DTI by a certain percentage. This can help borrowers qualify for a larger loan amount.
For example, if a borrower receives $1,000 per month in disability benefits that are not taxed, the lender may be able to gross up that income by 25%. This means that the lender would consider $1,250 per month when calculating the borrower’s DTI. This can increase the borrower’s buying power and make it easier to qualify for a larger loan amount.
Understanding the different DTI requirements and grossing up non-taxed income can be crucial for veterans looking to purchase a home. Veterans may have access to VA loans, which offer competitive interest rates and flexible DTI requirements. However, not all veterans may qualify for a VA loan, and other mortgage products may be necessary to secure financing.
The Veteran Mortgage Team can assist veterans in evaluating their financial situation, understanding the different mortgage products available to them, and finding the right loan that fits their needs and budget. They can help veterans navigate the complex process of homeownership and ensure they are making an informed decision that aligns with their long-term financial goals.
Conclusion
DTI is a critical factor that lenders consider when evaluating mortgage loan applications. The lower the DTI, the better chance a borrower has of being approved for a loan. Different mortgage products have varying DTI requirements, and borrowers may be able to increase their buying power by grossing up non-taxed income.
The Veteran Mortgage Team can help veterans navigate the complex process of securing a mortgage loan and finding the right loan that fits their financial situation. With their extensive knowledge and expertise, they can assist veterans in understanding the different mortgage products available to them and ensure they are making an informed decision that aligns with their long-term financial goals.
