Mortgage DTI – What Is Debt-to-Income Ratio?

by | May 31, 2024

The Ultimate Mortgage DTI Handbook

When it comes to securing a mortgage, understanding your finances has never been more important. One of the most important metrics lenders use when evaluating a borrower’s eligibility for a mortgage is Debt-to-Income ratio, commonly known as DTI. Let’s dive into what exactly mortgage DTI is, how it’s used, what sources of debt and income are considered, and what establishes a fair or good DTI.  Plus, we’ll offer some helpful tips for potential homebuyers on understanding their DTI.

What Is Debt-to-Income (DTI) Ratio?

DTI is a financing metric that compares an individual’s monthly debt payments to their gross monthly income. Essentially, it measures the percentage of your income that goes toward paying off debts. Lenders use DTI to assess a borrower’s ability to make monthly payments to repay the loan. DTI is calculated by dividing your total monthly debt payments by your gross monthly income and multiplying the result by 100 to get the ratio percentage.

Mortgage DTI

For example, if you have $1,500 in monthly debt payments and a gross monthly income of $5,000, your DTI would be 30%, as calculated below:

How DTI Is Used to Determine Mortgage Eligibility

Lenders look at your DTI to evaluate your ability to take on additional debt in the form of a mortgage. A lower DTI indicates that you have a good balance between debt and income, resulting in a more attractive and capable buyer. There are DTI thresholds that borrowers will need to meet, which can vary by lender or specified by the loan program guidelines.

Types of Mortgage DTI
  • Front-end DTI: Also called a housing ratio or mortgage-to-income, this ratio only calculates housing-related expenses, such as the monthly mortgage payment, property taxes, homeowners’ insurance premiums, and homeowners association fees, if applicable, relative to your gross monthly income.
  • Back-end DTI: This ratio includes all your monthly debt obligations, such as credit card payments, car loan payments, and student loan debt, in addition to the housing-related debt. Lenders typically focus more on back-end DTI when evaluating a buyer’s capability to repay a loan as it provides a clearer picture of their financial responsibilities.
Sources of Debt and Income Considered

What Is Considered a Favorable DTI?

A good DTI ratio for a mortgage depends on the type of loan and the lender. Most lenders prefer a back-end DTI of around 36% or less, though some may accept higher ratios, especially for borrowers with strong credit scores or significant assets.

Helpful Mortgage DTI Tips for Potential Homebuyers

1. Avoid New Debt 

Before applying for a mortgage, calculate your current DTI to give you a rough understanding of where you stand. This will help identify if you need to make any adjustments to potentially improve your DTI ratio before deciding to purchase a home.

2. Reduce Outstanding Debts

Paying down existing debts can significantly improve your DTI. Consider focusing on reducing or eliminating higher interest debts like credit card balances first.

3. Increase Your Income

Look for opportunities to boost your income. This could be through a salary increase, getting a higher-paying job, adding a part-time gig, or exploring other income sources.

4. Avoid New Debt

Refrain from taking on new debt before applying for a mortgage and during the loan approval process. New loans or credit lines may have an impact on your DTI and mortgage eligibility.

5. Seek Professional Advice

Consult with a financial professional for personalized guidance or a loan officer to get a better understanding of your DTI and loan program requirements. There may be other mortgage options better suited for you depending on your goals, such as Debt Service Coverage Ratio (DSCR) loans for investment properties that don’t use DTI.

6. Consider a Co-Signer

If your DTI is in the higher range, you may benefit from having a co-signer who has a higher income or less debt to contribute.

7. Understand Loan Programs

Guidelines and criteria to qualify for a mortgage vary depending on the program and lender. For example, FHA loans typically have more lenient DTI requirements than Conventional loans. Work with our team at Supreme Lending to explore a variety of different mortgage options and find the one best fit for you.

Managing Your Debt-to-Income Ratio

Understanding mortgage DTI and your Debt-to-Income ratio is essential for navigating the loan process. By managing your DTI and making informed decisions, you may potentially improve your mortgage eligibility and chances of securing your dream home.

Contact Supreme Lending to learn more about how we can help you achieve your homeownership goals with confidence.

 

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Benefits of FHA Loans for First-Time Buyers

by | May 9, 2024

Learn why FHA loans may be a perfect option for first-time buyers.

FHA loans first-time buyers

While first-time buyers are hunting for their perfect home, they’ll also need to be on the hunt for the perfect mortgage—which may seem more overwhelming and not as enjoyable as touring properties. There are several financing options to choose from and programs available. It’s all about finding the one that fits best. At Supreme Lending, our goal is to provide the guidance you need to make informed decisions and be confident with your loan choice.

In this article, we’re highlighting a mortgage option that is designed specifically to help first-time buyers, FHA loans. Discover the many FHA loan benefits and why this option may be right for you.

Understanding FHA Loans: A Brief Overview

First, what exactly is an FHA loan? The Federal Housing Administration (FHA), a branch of the U.S. Department of Housing and Urban Development (HUD), insures FHA loans, which are issued by approved lenders. This insurance protects lenders against losses if a borrower defaults on their loan, making FHA loans less risky for lenders and consequently more accessible to first-time buyers.

FHA Loan Benefits

1. Low Down Payments.

To help overcome one of the biggest barriers for first-time homebuyers, FHA loans typically require a lower down payment compared to Conventional loans. This makes homeownership more accessible to people who may not have substantial savings or want to pay less upfront costs.

2. Flexible Credit Requirements.

FHA loans are more lenient when it comes to credit, allowing borrowers with lower credit scores to qualify for financing, which is beneficial for those who are still establishing their credit history. See common credit score and down payment requirements here.

3. Assumable Loans.

What does this mean? FHA loans are assumable, which means that if you sell your home, the buyer can take over your FHA loan, potentially offering them a competitive advantage in a rising interest rate environment. Restrictions on assumability may apply.

4. Lenient Debt-to-Income (DTI) Ratios.

DTI compares a borrower’s debt to their monthly income to measure’s their ability to manage monthly mortgage payments. FHA loans often allow for higher debt-to-income ratios compared to Conventional loans.

5. Lower Mortgage Insurance Premiums.

While FHA loans require mortgage insurance premiums (MIP), the premiums are often lower than those of Conventional loans, especially for borrowers with lower credit scores or smaller down payments. In fact, the FHA annual mortgage insurance premium was lowered from 0.85% to 055% in 2023 for most borrowers.

6. Seller Closing Cost Assistance.

Another benefit buyers could take advantage of is negotiating seller concessions to help cover upfront costs. FHA loans can allow sellers to contribute up to 6% toward the buyer’s down payment, appraisal fees, or other associated closing costs.

7. Gift Funds.

Gift funds are given to someone with no expectation of repayment, for example parents gifting their newlywed children money for a down payment. FHA loans allow borrowers to use gift funds from family members or other eligible sources to cover their down payment and closing costs. Note: A gift letter is required to confirm the gift funds.

8. Renovation Loans.

The FHA 203(k) Renovation loan is a home rehabilitation financing option, which allow borrowers to finance both the purchase price of the home and the cost of eligible renovations or repairs into a single loan. This helps buyers afford any necessary improvements and can open their home search to consider fixer-uppers.

9. Streamline Refinancing.

FHA loans offer a streamlined refinancing option, known as the FHA Streamline Refinance. This allows borrowers to refinance their current FHA loan with minimal paperwork and documentation, saving time and money.

10. No Prepayment Penalties.

FHA loans do not have prepayment penalties unlike some traditional mortgages. This allows borrowers to pay off their mortgage early without facing additional fees or charges, which can save money on interest over time.

11. 100% FHA Financing Available.

Did you know Supreme Lending offers two competitive FHA 100% financing options? Through the Chenoa Fund or the Supreme Dream program, these include a 30-year fixed-rate FHA loan paired with a second forgivable loan to be used toward down payment, closing costs, and prepaids.

These benefits make FHA loans an attractive option for first-time homebuyers, offering accessibility, flexibility, and affordability to achieve homeownership.

Ready to get started? Contact Supreme Lending today to learn more about FHA loans or other mortgage services we offer.