How does Debt to Income Ratio work?

[Anonymous]

OP here. Thank you all for your replies and honest feedback. Yes, I may be woefully uneducated/in denial about personal finance, but right now I am trying to take the right steps for my family. To be clear, I am not actively looking for a house to buy, I am merely trying to figure out what it takes to do so.

In some ways, my lack of education about financial matters is a product of our culture, especially in regards to people who come from low SES such as myself and my husband. No one ever taught me these things. There were no required courses in personal finance or the psychology of finance. Of course I know that it is untimely my responsibility to educate myself, but there is an economic culture that works against people like me.

[Anonymous]

Anonymous wrote:OP here. Thank you all for your replies and honest feedback. Yes, I may be woefully uneducated/in denial about personal finance, but right now I am trying to take the right steps for my family. To be clear, I am not actively looking for a house to buy, I am merely trying to figure out what it takes to do so.

In some ways, my lack of education about financial matters is a product of our culture, especially in regards to people who come from low SES such as myself and my husband. No one ever taught me these things. There were no required courses in personal finance or the psychology of finance. Of course I know that it is untimely my responsibility to educate myself, but there is an economic culture that works against people like me.

Sorry- ultimately, not untimely.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:DTI ratio is literally your monthly debt divided by your monthly income. Not knowing anything about your student debt I would imagine going on a payment plan that's income based would presumably reduce your monthly payment, and thus reduce your debt to income. Usually these kinds of changes only get picked up by the bureaus in 30 to 60 days, but it's addressable if you just provide the bank with proof.

The other thing that impacts your dti is car loans, mortgages, credit card debt, etc. Simply put the best way to improve your ratio is to pay off debt that is high monthly payment and short term (car payments usually are). Other obvious option is to go FT and raise your income.

Also, calculate your debt to income with your husband included cause that's how the bank will. Don't include credit cards you pay off every month, only ones that carry a balance.

All this said a DTI of 75% is insanely high. Without passing any judgement at all, you may want to reconsider buying a house honestly, both because it'll really burden you and because sounds like you already have a metric shitton of debt. And getting approved with that dti and forbearance is going to be tough and only happen at higher rates.

The bolded part is incorrect. The bank WILL calculate the MIMIMUM payment on every credit card you have that has a balance. If you have a balance on a card at the time the credit report is run- that minimum payment will be included.

But if you payoff your cards every month, it won't show a balance.

That is incorrect. If you pay your BALANCE in full every month- you still have a balance on any given month if it is a card you use regularly (hence the thing you are paying off in full). The credit companies do report THAT balance. For me- I use my rewards card for everything- I may charge $2000/month on it. I pay it off every month- but my bank will report my balance as of the last statement.

Peculiar. None of mine do. They report utilization, but balance is $0 as by definition, paying off the balance means there is no balance.

OK. I will try and rephrase this differently so maybe you will understand. I will also try and go slower.

If you have a credit card bill, that you pay off each month, you receive a statement. On that statement, there is a balance due. If you charge on it EVERY month- the balance due will never be zero- so whatever that amount is- that is the balance that is reported on your credit report. The monthly payment is most likely minimal- but it is still counted against you. I have been analyzing credit and credit reports for 20+ years. If yours didn't report your balance, I would be very surprised.

If you've been analyzing credit and credit reports for 20 years, I'm really surprised you don't know that you pay the credit card off before the statement date to show a zero balance on the report. It's not that complicated.

That is not how it was presented. It was presented that the Balance was paid in full each month - which means the statement is mailed out and the person pays the balance. Vey few people actually pay off the balance BEFORE the statement is generated. Try reading what was actually discussed before making a snarky remark.

[Anonymous]

Anonymous wrote:OP here. Thank you all for your replies and honest feedback. Yes, I may be woefully uneducated/in denial about personal finance, but right now I am trying to take the right steps for my family. To be clear, I am not actively looking for a house to buy, I am merely trying to figure out what it takes to do so.

In some ways, my lack of education about financial matters is a product of our culture, especially in regards to people who come from low SES such as myself and my husband. No one ever taught me these things. There were no required courses in personal finance or the psychology of finance. Of course I know that it is untimely my responsibility to educate myself, but there is an economic culture that works against people like me.

Good for you. You are taking steps in the right direction. Ignore the snarky posters and good luck!

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:DTI ratio is literally your monthly debt divided by your monthly income. Not knowing anything about your student debt I would imagine going on a payment plan that's income based would presumably reduce your monthly payment, and thus reduce your debt to income. Usually these kinds of changes only get picked up by the bureaus in 30 to 60 days, but it's addressable if you just provide the bank with proof.

The other thing that impacts your dti is car loans, mortgages, credit card debt, etc. Simply put the best way to improve your ratio is to pay off debt that is high monthly payment and short term (car payments usually are). Other obvious option is to go FT and raise your income.

Also, calculate your debt to income with your husband included cause that's how the bank will. Don't include credit cards you pay off every month, only ones that carry a balance.

All this said a DTI of 75% is insanely high. Without passing any judgement at all, you may want to reconsider buying a house honestly, both because it'll really burden you and because sounds like you already have a metric shitton of debt. And getting approved with that dti and forbearance is going to be tough and only happen at higher rates.

The bolded part is incorrect. The bank WILL calculate the MIMIMUM payment on every credit card you have that has a balance. If you have a balance on a card at the time the credit report is run- that minimum payment will be included.

But if you payoff your cards every month, it won't show a balance.

That is incorrect. If you pay your BALANCE in full every month- you still have a balance on any given month if it is a card you use regularly (hence the thing you are paying off in full). The credit companies do report THAT balance. For me- I use my rewards card for everything- I may charge $2000/month on it. I pay it off every month- but my bank will report my balance as of the last statement.

Peculiar. None of mine do. They report utilization, but balance is $0 as by definition, paying off the balance means there is no balance.

OK. I will try and rephrase this differently so maybe you will understand. I will also try and go slower.

If you have a credit card bill, that you pay off each month, you receive a statement. On that statement, there is a balance due. If you charge on it EVERY month- the balance due will never be zero- so whatever that amount is- that is the balance that is reported on your credit report. The monthly payment is most likely minimal- but it is still counted against you. I have been analyzing credit and credit reports for 20+ years. If yours didn't report your balance, I would be very surprised.

If you've been analyzing credit and credit reports for 20 years, I'm really surprised you don't know that you pay the credit card off before the statement date to show a zero balance on the report. It's not that complicated.

That is not how it was presented. It was presented that the Balance was paid in full each month - which means the statement is mailed out and the person pays the balance. Vey few people actually pay off the balance BEFORE the statement is generated. Try reading what was actually discussed before making a snarky remark.

But clearly what was meant... Poster kept pointing out they didn't carry a balance.

[Anonymous]

Not the OP: Would anyone know the maximum debt to income ratio a mortgage lender would give for someone with excellent credit and fairly substantial assets?

[Anonymous]

Anonymous wrote:Not the OP: Would anyone know the maximum debt to income ratio a mortgage lender would give for someone with excellent credit and fairly substantial assets?

Im beginning to wonder how much the substantial assets would even matter. It would matter what KIND of assets.

[Anonymous]

Anonymous wrote:Not the OP: Would anyone know the maximum debt to income ratio a mortgage lender would give for someone with excellent credit and fairly substantial assets?

Traditional mortgages DTI is 38%
FHA mortgages DTI is 41%

This is the suggested guideline. Everything is, quite honestly, automated. There is quite a bit of wiggle room - especially with liquid assets. That being said- on a personal level- I would stick under 30% - but I tend to be more conservative with my finances.

[Anonymous]

Anonymous wrote:

Anonymous wrote:Not the OP: Would anyone know the maximum debt to income ratio a mortgage lender would give for someone with excellent credit and fairly substantial assets?

Im beginning to wonder how much the substantial assets would even matter. It would matter what KIND of assets.

Sbstantial asstes do matter and you are correct- what kind of assets do matter. Obviously liquid is best. Retirement, 401Ks and TSP's count at a fraction of their value (depending on the program). The automated systems love to see liquid assets (underwriters like it too!)

[Anonymous]

Anonymous wrote:

Anonymous wrote:Not the OP: Would anyone know the maximum debt to income ratio a mortgage lender would give for someone with excellent credit and fairly substantial assets?

Im beginning to wonder how much the substantial assets would even matter. It would matter what KIND of assets.

About $500K in stock, cash, etc. --- very liquid and not in tax deferred accounts. About $700K in tax deferred accounts such as 401Ks', IRA, etc. Then there is equity in our house. No debt other than the mortgage.

Our current mortgage holder will accept up to 43% but wondering if there are other lenders who'd go higher. Our non-housing expenses are quite minimal for the most part.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:Not the OP: Would anyone know the maximum debt to income ratio a mortgage lender would give for someone with excellent credit and fairly substantial assets?

Im beginning to wonder how much the substantial assets would even matter. It would matter what KIND of assets.

About $500K in stock, cash, etc. --- very liquid and not in tax deferred accounts. About $700K in tax deferred accounts such as 401Ks', IRA, etc. Then there is equity in our house. No debt other than the mortgage.

Our current mortgage holder will accept up to 43% but wondering if there are other lenders who'd go higher. Our non-housing expenses are quite minimal for the most part.

Are you buying a new house and keeping the old one or are you talking about refinancing? I have had the automated system go as high as 54% in the past- but the liquid assets were enough to pay off the house. They had additional income- it just wasn't something that could be easily documented. Bottom line- if the automated system approves it- the underwriter is usually OK with it (as long as the file is in order).

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:Not the OP: Would anyone know the maximum debt to income ratio a mortgage lender would give for someone with excellent credit and fairly substantial assets?

Im beginning to wonder how much the substantial assets would even matter. It would matter what KIND of assets.

About $500K in stock, cash, etc. --- very liquid and not in tax deferred accounts. About $700K in tax deferred accounts such as 401Ks', IRA, etc. Then there is equity in our house. No debt other than the mortgage.

Our current mortgage holder will accept up to 43% but wondering if there are other lenders who'd go higher. Our non-housing expenses are quite minimal for the most part.

Are you buying a new house and keeping the old one or are you talking about refinancing? I have had the automated system go as high as 54% in the past- but the liquid assets were enough to pay off the house. They had additional income- it just wasn't something that could be easily documented. Bottom line- if the automated system approves it- the underwriter is usually OK with it (as long as the file is in order).

Wanting to refi our present mortgage including consolidating a HEL into the first - the HEL is with the same lender who holds the first. Based on current prevailing rates our ratio would be 55%. It is even higher right now - quite a bit higher. We got the mortgage when our income was a lot more. We have no problem making the payments but it would be helpful to get our payments lower.

When I talked to the current mortgage holder, I explained they were already on the hook for the mortgage and so it would seem that it would be in their interests to lower our payment to make it even less likely that we would default. I was told that any app would go through the automated process and if it was over 43% it would almost automatically get kicked out though they saw my point about the lower payment making it even less likely we'd default.

I was told that if it could get to a higher level of review, it would be looked at more individually but at the same time, it would never reach that higher level of review based on the percentage we are at now.

BTW, our track record for payment has been perfect - no late payments, etc

[Anonymous]

Anonymous wrote:When you say 75% debt to income ration on student loans, are you saying that you owe 75K, and earn 100K (for example), or 75% of your salary goes to servicing loans?

The Debt to income ration is based on monthly expenses.

For example, each month, I pay 1000 for car loans, 2200 for mortgage, and 800 on credit cards. so I pay 4000 in debt. My gross income is 12K per month, so my debt to income ratio in 33% (1/3).

That's what I was trying to figure out. I got the 75% from my credit report, but if I understand correctly it's this high because that is what I am projected to pay once I am out of forbearance if I were to go on the standard 10 year repayment plan on my current income.

[Anonymous]

Anonymous wrote:

Anonymous wrote:When you say 75% debt to income ration on student loans, are you saying that you owe 75K, and earn 100K (for example), or 75% of your salary goes to servicing loans?

The Debt to income ration is based on monthly expenses.

For example, each month, I pay 1000 for car loans, 2200 for mortgage, and 800 on credit cards. so I pay 4000 in debt. My gross income is 12K per month, so my debt to income ratio in 33% (1/3).

That's what I was trying to figure out. I got the 75% from my credit report, but if I understand correctly it's this high because that is what I am projected to pay once I am out of forbearance if I were to go on the standard 10 year repayment plan on my current income.

I actually owe 172k (gulp). I think I am going to have a heart attack just writing that number. I have no effing clue how I am ever going to pay that.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:DTI ratio is literally your monthly debt divided by your monthly income. Not knowing anything about your student debt I would imagine going on a payment plan that's income based would presumably reduce your monthly payment, and thus reduce your debt to income. Usually these kinds of changes only get picked up by the bureaus in 30 to 60 days, but it's addressable if you just provide the bank with proof.

The other thing that impacts your dti is car loans, mortgages, credit card debt, etc. Simply put the best way to improve your ratio is to pay off debt that is high monthly payment and short term (car payments usually are). Other obvious option is to go FT and raise your income.

Also, calculate your debt to income with your husband included cause that's how the bank will. Don't include credit cards you pay off every month, only ones that carry a balance.

All this said a DTI of 75% is insanely high. Without passing any judgement at all, you may want to reconsider buying a house honestly, both because it'll really burden you and because sounds like you already have a metric shitton of debt. And getting approved with that dti and forbearance is going to be tough and only happen at higher rates.

The bolded part is incorrect. The bank WILL calculate the MIMIMUM payment on every credit card you have that has a balance. If you have a balance on a card at the time the credit report is run- that minimum payment will be included.

But if you payoff your cards every month, it won't show a balance.

That is incorrect. If you pay your BALANCE in full every month- you still have a balance on any given month if it is a card you use regularly (hence the thing you are paying off in full). The credit companies do report THAT balance. For me- I use my rewards card for everything- I may charge $2000/month on it. I pay it off every month- but my bank will report my balance as of the last statement.

Peculiar. None of mine do. They report utilization, but balance is $0 as by definition, paying off the balance means there is no balance.

OK. I will try and rephrase this differently so maybe you will understand. I will also try and go slower.

If you have a credit card bill, that you pay off each month, you receive a statement. On that statement, there is a balance due. If you charge on it EVERY month- the balance due will never be zero- so whatever that amount is- that is the balance that is reported on your credit report. The monthly payment is most likely minimal- but it is still counted against you. I have been analyzing credit and credit reports for 20+ years. If yours didn't report your balance, I would be very surprised.

If you've been analyzing credit and credit reports for 20 years, I'm really surprised you don't know that you pay the credit card off before the statement date to show a zero balance on the report. It's not that complicated.

Oh FFS. The other poster is right. And You are an idiot.