How to Figure Out Debt to Income Ratio Calculator?
*Investment & Savings - capital gain, dividend, interest, rental income
*Other Income - gift, alimony, child support
*Other Loans and Liabilities - personal loan, child support. alimony, etc.
Debt to Income Ratio Explanation
The amount of money you can borrow depends on your
credit score,
loan program, and the monthly debt you pay each month. The
debt-to-income ratio is a simple formula that compares how much
monthly income you earn against your monthly obligations.
There are two calculations: the payment calculation and the debt
calculation. The payment calculation is the maximum mortgage payment
if the applicant has little or no monthly debt.
The payment calculation includes principal and interest, 1/12 of the
real estate taxes, 1/12 of the homeowner's insurance premium,
private mortgage insurance (or MIP), and any other required monthly
obligations (i.e., homeowner's association fee, etc.).
The back-end ratio calculation is the maximum amount of monthly
debt, including the proposed mortgage payment that the applicant can
carry for the loan program.
Here's the calculation:
Debt to Income Ratio Calculation | ||
---|---|---|
Gross monthly income | $6,000 | |
Monthly Payments: | front-end ratio | back-end ratio |
Proposed Mortgage payment | $800.00 | $800.00 |
Car payment | - 0 - | $250.00 |
Minimum credit card payments | - 0 - | $200.00 |
School loans | - 0 - | $1,000.00 |
Installment loan | - 0 - | $50.00 |
TOTAL | $800.00 | $2,300 |
Debt to income calculation | $800 / $6,000 | $2,300 / $6,000 |
Debt ratio | 13.33% | 38.33% |
Debt to Income Ratio for an FHA Loan
https://www.pafirsttimehomebuyer.net/fha-loan-pa.html
The Federal Housing Administration uses the applicant's credit score
to determine the debt ratio percentage for the monthly payment and
monthly debt. For 580 and more significant credit scores, the
"ideal" price is 31% of the applicant's monthly income and 43% for
the monthly debt and proposed mortgage payment. As you can see from
the chart below, the FHA will allow a debt ratio as high as 40% for
the price and 50% for the debt ratio, with compensating factors.
Debt to Income Ratio for a VA Loan
https://www.pafirsttimehomebuyer.net/va-loans-pa.html
The Veteran's Administration approaches the debt-to-income ratio
differently from the FHA, USDA, and conventional loan lenders.
The VA only uses the back-end or debt ratio as the initial
qualification for a VA home loan. The VA believes the "ideal" debt
ratio should be 41%, which means that the monthly loan payment
without any debt should not exceed 41%, or the proposed mortgage
payment with monthly debt should be limited to 41% of the borrower's
gross monthly income.
The Veteran's Administration requires one more calculation to
determine the maximum loan amount; the calculation is called
residual income. The VA believes that the veteran should have
enough money at the end of the month to pay for food, utilities,
child support, and other expenses. The residue income analysis
is more important to the Veteran's Administration than the 41%
debt ratio.
Debt to Income Ratio for a USDA Loan
https://www.pafirsttimehomebuyer.net/usda-loan-pa.html
The USDA usually follows the FHA underwriting (approval) guidelines.
However, the USDA departs from the FHA regarding the debt-to-income
ratio.
The USDA prefers a 29% payment percentage and a debt ratio of 41%,
and the USDA will permit higher ratios with tight limits.
The Conventional Loan Debt to Income Ratio Limits
https://www.pafirsttimehomebuyer.net/conventional-loan-pa.html
Conventional home loans are mortgages that
meet the lending guidelines of the Federal National Mortgage
Association (Fannie Mae) and the Federal Home-Loan Mortgage
Corporation (Freddie Mac).
The federal government does not back conventional loans and does not
require any upfront mortgage insurance. These loans need mortgage
insurance when the purchase has a down payment of less than 20%, or
if the loan is to refinance an existing mortgage, the equity must be
at least 20% to avoid the private mortgage insurance cost.
The conventional debt to income limits the payment ratio to 31% and
will permit the debt ratio to extend to 45% if the borrower meets
the credit score and cash reserve requirements.
Determining Your Monthly Income
https://www.pafirsttimehomebuyer.net/year-to-date-income.html
The lender uses different approaches to determine the applicant's
monthly income. The most common way of deciding monthly payments is
the year-to-date income calculation.
The YTD income calculator will estimate your monthly income, and the
calculator can add up your monthly debt payments.
What Affects the Debt to Income the Most?
Without a doubt, your credit score has the most significant
influence on your debt-to-income ratio. Lenders use credit scores to
calculate your interest rate.
That may not seem fair, especially if your credit score has suffered
due to a divorce or an unethical creditor, but this is our world. A
higher interest rate implies a larger monthly mortgage payment, and
the private mortgage insurance premium (PMI) for traditional
mortgages is also affected by credit score.
PMI rises when the credit score falls.
The FHA or USDA does not use credit scores to determine monthly
mortgage insurance costs, and the VA loan program has no private or
monthly mortgage insurance fees.
How Can I Improve My Debt to Income Ratio?
The first step to improving your debt-to-income ratio is to
raise your credit score. It might mean delaying your purchase or
refinance, but strengthening your credit may be the right decision
in the long run. Catching up on past-due bills, paying off
collection accounts and judgments, and keeping your credit card
balances at 50% or less than the credit limit can lift your credit
score.
Another option is adding a co-signer. Co-signers work well with the
FHA program. The FHA adds up your monthly income and debt and the
co-signer(s) income and debt to calculate the debt-to-income ratio.
Co-signers are not as effective with conventional loans, and the VA only recognizes spouses for maximum eligibility. The USDA requires that the co-signer is an occupant of the home.
Consider Debt Consolidation
Debt consolidation may decrease your credit score for a short period, but by lowering your overall monthly obligations, you can boost your ratio.
If you found this information useful, please tell a friend.