You may have heard of lenders offering jumbo loans for borrowers with 55% DTI. DTI stands for debt-to-income ratio, a loan metric as important as your credit score. For stated income loans, the DTI might not figure out that much compared to the size of the down payment and cash reserve and the level of the credit score. Nevertheless, it shows how much you owe relative to how much you earn and could cause lenders concern about your ability to repay your mortgage.
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Two Types of Debt-to-Income Ratio
There are two ways lenders look at and compute your debt-to-income ratio.
1. Front-end ratio. This calculates how much of your gross income, expressed in percentage, goes to housing. Thus known as the housing ratio, it takes into account the monthly payments on any mortgage (first and second), property taxes, homeowner’s insurance, mortgage insurance, and homeowners’ association fees, as applicable. Utilities are not included.
To calculate, divide the gross housing costs by the gross income, multiply by 100. Say your housing-related expenses total $4,000 and your monthly income is $10,000, your front-end DTI is 40%.
2. Back-end ratio. Also known as the total debt-to-income ratio because it sums up the housing expenses; all debts requiring monthly payments, including car loans, student loans, credit cards, mortgages on other properties and related taxes, insurance and HOA fees; child support; alimony; and more.
For example, your housing expenses plus your other monthly debts add up to $5,500. Divide this by $10,000 and multiply 100 and you’ll get a total DTI of 55%.
What Is (Not) Considered Debt?
For a more accurate DTI, it must take into account all the monthly payments you make. The following obligations are not considered debt and are thus not subtracted from your gross income as listed by the CFPB:
- Automatic deductions to savings accounts
- Child care
- Commuting costs
- Federal, state and local taxes
- FICA (Federal Insurance Contributions Act) or other retirement contributions, e.g. 401(k) accounts
- Open accounts with zero balances
- Union dues
- Voluntary deductions
Lenders and loan programs will still vary on calculating qualifying ratios for a mortgage. Always ask lenders. You can find them here.»
DTI for Stated Income Loans
There is no set maximum DTI ratio for stated income loans. It’s possible to have a DTI ratio of the total monthly income to the total monthly debt beyond 43%, all things considered.
Back in the days when the original stated income loans were all the rage, lenders were more strict with DTI. It’s because the income stated on the loan must have a DTI whose numbers add up.
There’s also the issue of the income matching the job description of the borrower. As in the case now, if your stated income is too high for your position, the lender may deny your loan application or ask for further documentation, making it a full doc loan.
Needless to say, your DTI should match your stated income.