Lets explore debt ratio from multiple angles so that you can see the whole picture. Debt ratio is also referred to as DTI (“Debt to Income”) and these terms are used by me and my team to qualify buyer every day! DTI refers to the total percent of a borrower’s income that is allocated to both their housing payment (including 1/12th of the annual taxes & insurances) plus other long term debt such as loan payments, minimum payments due on credit cards and child support & alimony.
What is the max debt ratio?
If only it were that simple. The max debt ratio varies from person to person (depending on credit score and credit profile), loan type, down payment and reserves (money left over in your savings account after you close). So how you know what your max debt ratio is? When you get preapproved for a mortgage, the lender runs your file through automated underwriting to determine what your max debt ratio is.
Rules of Thumb
FHA = 55% max debt ratio
Conventional = 50% max debt ratio
Conventional low down payment or lower credit score = 45% max debt rato
Rural Housing = 45% max debt ratio
VA = 50% max debt ratio
The math…
Hypothetical Example:
Borrower earns $6000/month
Borrower has a car payment of $500 and a student loan payment of $100 and a minimum due on credit cards of $150. Total debt is $750.
If automated underwriting says that the borrower can have a max debt ratio of 50% then the $6000 monthly income X 50% = $3000. From that $3000 we subtract the $750 debt and determine this person can qualify for a payment up to $2250/month.