Debt-to-Income Ratio...Is that kinda like the sleep number???

If you have ever applied for a home loan, you probably remember the loan officer talking about your 'debt-to-income ratio' or your 'ratios'. I bet you thought to yourself...'blah, blah, blah' and tuned out until he/she got down to the basics...the important stuff...'How much home can I afford, and how much will my monthly payment be?'

A Debt-to-Income Ratio (DTI) is the percentage of a consumer's monthly gross income that goes toward paying debts. In addition to debt, the DTI can also cover other recurring expenses such as taxes, fees and insurance. To make things even more complicated, there are two different kinds of DTI...the front ratio and the back ratio.

The front ratio is the percentage of your monthly gross income that is used to pay your housing costs, including principal, interest, taxes, insurance, mortgage insurance (when applicable) and homeowners association fees (when applicable). For a renter, the front ratio is the monthly rent. For a home owner, the front ratio is the PITI (Principle, Interest, Taxes & Insurance)...and mortgage insurance and home owner association dues, if applicable.

The back ratio is a combination of all of the expenses included in the front ratio, along with your monthly consumer debt. Consumer debt can be car payments, credit card debt, installment loans and similar expenses such as student loan payments, child support payments, alimony payments and legal judgments.. (Auto and life insurance are not categorized as debt.)

You are probaby asking yourself right now...'How can I find out my DTI?' Unlike the 'sleep number', the DTI Ratio has nothing to do with your comfort...it is all about the bank's comfort level with regard to your ability to pay your mortgage payment.

Typically, qualifying ratios for conventional loans is 28/36. This means that no more than 28% of your gross income may be used to pay your total housing expenses, and no more than 36% may be used to pay your total housing expenses plus recurring debt.

Debt to Income Example:

Yearly Gross Income = $60,000 / Divided by 12 = $5,000 per month income
$5,000 Monthly Income x .28 = $1,400 allowed for housing expense
$5,000 Monthly Income x .36 = $1,800 allowed for housing expense plus recurring debt.

Qualifying ratios vary depending on loan type and the credit worthiness of the buyer. For instance, FHA Loans have a slightly higher qualifying ratio of 29/41.

In an earlier post, I discussed the importance of being pre-approved before you begin your home search. Your DTI is only one aspect of your credit picture that your loan officer will examine in order to determine your qualification for a mortgage.

In my next post, I'll discuss 'good' debt versus 'bad' debt. (Can't you just hear the music from the old western movies??) Smile...

If you, or someone you know, is planning to buy or sale...I'd love to help! Please contact me, Elizabeth Nieves, Broker, REALTOR® The Elizabeth Nieves Realty Group @ Keller Williams(919)749-3749 or Elizabeth@ElizabethNieves.com

To search EVERY HOME FOR SALE IN THE MLS...visit my website @ http://www.elizabethnieves.com/.