You may have heard of this term when applying for a loan; what does it mean?
Debt-to-Income ratio is a comparison of monthly debts to monthly income, this is a major factor lenders consider when underwriting a loan.
Lenders like to see the ratio at or below 43%, but loans have been approved up to 50%.
Example: Let’s say you are salaried and gross $4,000 per month; Lenders use your gross wages, not take home, for calculating the ratio. Assume your proposed house payment is $1,000, you pay $400 in student loans and another $300 per month for an auto loan.
Also suppose you have a credit card balance of $3,000 that requires a minimum monthly payment of $200. Your debt-to-income ratio would be 47.5%. This is calculated by totaling all of your monthly debt:
($1,000+$400+$300+$200=$1,900) and dividing by your monthly income of $4,000.
Under this example, you may be able to qualify.
This is a simple example, it becomes a little more difficult to calculate if you have commission income, are self-employed or a contracted employee. In these instances, lenders typically take the net income and average it over two years.
How about if you don’t have a job?
You may still be able to qualify as there may be other sources that can be considered as income, such as rental income, social security, and pension.
How about if you have a student loan in deferment?
The lender will want to know what will be the monthly payment once out of deferment and will ask you to get it from the student loan company so they can put it into the equation.
If you have a question as to whether your debt-to-income ratio qualifies, ask us and we’ll be happy to help!
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