Which Debts Count When Your DTI Is Determined for a Mortgage?

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You may be surprised at what's included in your DTI calculation.

When you apply for a mortgage, lenders will take a close look at what your current financial obligations are and how much your future home loan will cost you. To ensure that you aren't getting in too deep and taking on more financial obligations than you can fulfill, lenders do a calculation to determine something called your "debt-to-income ratio," or DTI.

Your debt-to-income ratio is a measure of your debt relative to your income. If it is too high, you most likely won't get approved for a home loan. But, the big question you may have is exactly what debts are included when the calculation is done?

What's included in your debt-to-income ratio?

Mortgage lenders actually calculate your debt-to-income ratio twice, because they look at a front-end DTI and a back-end DTI.

Calculating the front-end DTI is easy because the focus is only on the new mortgage obligations. Lenders look at your new housing payment, including principal, interest, taxes, and insurance, and they compare total housing costs to gross income. Most lenders like this ratio to be below 28%.

Calculating your back-end DTI becomes a little more complicated, though. This time, lenders look at all of your current debt obligations when they decide whether or not to approve you. That means a lot more debts count, including:

  • Your new monthly mortgage payments (including principal, interest, taxes, and insurance)
  • Credit card minimum payments
  • Minimum monthly payments on medical debt
  • Your monthly car loan payment
  • The monthly payments on any personal or business loans you may have
  • Alimony or child support payments
  • Any other required monthly payments

Lenders will take a close look at your credit report and may ask for financial account statements in order to determine all of the obligations you have.

They'll add up the monthly payments for all of these different expenses and then compare that to income. For example, say that your total monthly obligations add up to $2,000 when taking into account all your minimum payments and your new mortgage -- and say your income is $6,000. You'd divide $2,000 divided by $6,000 to see your DTI is .333 or 33.3%.

Obviously, the chances are good that you'll have other debts besides just your mortgage. Lenders know this, so they allow your back-end DTI to be a bit higher (although ideally it should be below 36%).

What should you do to make sure your DTI ratio doesn't derail your mortgage application

Although a lower DTI is better, some lenders are more flexible than others. In fact, you may be able to find loan options with a DTI as high as 50% in some cases. If you have a high ratio, you'll need to shop around more carefully to find a lender willing to work with you.

Another option may be to pay off debt. If you're able to reduce what you owe and eliminate some debts or lower your monthly payments, you should hopefully be able to get your DTI to a level that makes you a more competitive borrower.

Since this can also help your credit score, you may just find that you're offered a much better deal on a mortgage if you work to pay down some of your debt before applying for one. The savings on interest over time can be considerable, so it's worth working on debt paydown if you can.

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