How does the debt-to-income ratio (DTI) work?
Your debt-to-income ratio (DTI) tells lenders how high your debt load is and they use it to help them predict whether you’ll be able to make your monthly mortgage payments.
How is the DTI calculated?
The DTI is easy to calculate. First, add up all of your monthly debt payments. Do not include recurring expenses, such as your electricity or grocery bill. Then, divide the total amount of your monthly debts by your gross monthly income. You will end up with a decimal number. Multiply by 100 to get your DTI ratio as a percentage. For example, a DTI calculation of 0.43 × 100 = 43%.
What is a good DTI to have when applying for a VA home loan?
Ideally, lenders like to see applicants with DTIs of around 36% or less. In general, conforming loans – home loans made by private lenders and later sold to Fannie Mae and Freddie Mac – cannot exceed a DTI of 45%. At a DTI of 45%, applicants must meet strict credit score and down payment requirements.
Generally, lenders are unwilling to lend to buyers who have a DTI of 50% or more. VA loans may be an exception to this rule.
Housing Expenses Vs. Overall DTI: What’s the Difference?
Another metric that lenders consider in addition to your overall DTI is your housing expense ratio. This is calculated by adding up just your housing costs and dividing it by your gross monthly income. For tenants, it is simply rent. For homeowners, this would include your PITI, or principal, interest, property taxes, and homeowners insurance premiums.
Some lenders refer to the widely accepted rule of thumb – called “the 28/36 rule” – of housing affordability. This rule would apply to a VA mortgage applicant who spends 28% of their monthly gross income on housing expenses and no more than 36% on their overall debts – including student loans, car payments and debt. credit card.
Keep in mind that these guidelines are probably unrealistic if you live in one of the most expensive areas of the United States, and most lenders realize how difficult it is to maintain a low debt-to-income ratio, especially especially in these times of inflation.
If your credit score is between 580 and 619, Rocket Mortgage® requires you to have a Housing Expense Ratio of no more than 38% and an overall DTI of no more than 45%. Unless you have had something like bankruptcy or foreclosure in the past, in most other cases your eligible DTI is based on what the VA underwriting systems will approve.