DTI Archives - Stated-Income

Forget down payment for now. When you plan to get a mortgage, one of the very first things to consider is your ability to repay this debt. That’s why, verification of income on all mortgages, stated income loans included, is an essential step to get approved for the mortgage.

Lenders primarily want to know if you have a steady and reliable income to support your monthly payments. When can a lender say that you are making enough to be able to afford your loan payments? How do you determine this income required for a mortgage?

Find the answer to the question below. Find lenders here, too.

Understanding Income and Mortgage

Stated income loans of yesteryears can attest to this. A decade ago, it was easy to make loans based on the borrower’s word that he/she is earning this much. The stamp of approval did not rely on any verification.

But that’s highly unlikely now. Stricter rules and policies are in place to ensure loans are safe for consumers and lenders. Today’s stated income loans, for example, may forgo tax returns, but alternative documentation like assets and bank statements will be verified.

Income’s importance in mortgage qualification can’t be emphasized enough. And how much you need in order to qualify is a combination of several factors.

Calculating Income Required for Mortgage

To determine the level of income you need to qualify for a mortgage, consider the following:

Monthly housing expenses. This is what you spend on housing, e.g. mortgage payment — principal, interest, property taxes and homeowners insurance (one-twelfth), homeowners association fees — or rent.
Monthly liabilities. This refers to your total monthly expenses, housing and other debt obligations such as car loans, student loans, alimony/child support, and payments on loans that you are a co-borrower to. Utilities are not included.
Mortgage amount. The amount you need to borrow for your home loan.
Mortgage rate. The interest that you’ll receive on your mortgage. If you are getting a fixed-rate mortgage, this won’t change throughout the life of the loan. For an adjustable-rate mortgage, the start rate will adjust periodically. You can get pre-approved to get a definite rate from the lender or shop for mortgage quotes for now here.
Mortgage term. The length of time to pay off the loan. This affects the calculation of your monthly principal and interest payments.

There are online calculators that will crunch the numbers based on those variables.

Knowing Your DTI

Where does your current monthly income fit in all of this?

Lenders use debt-to-income ratio to measure your ability to comfortably take on the loan given your total monthly liabilities including housing costs as noted above and your gross monthly earnings.

To get this DTI, you’ll divide your monthly liabilities by your monthly income before taxes. Your DTI calculation may be different from that of lenders because not all sources of income may be qualified for mortgage purposes.

Nonetheless, your DTI ratio will be your guide in determining your capacity to afford a mortgage for now. Lenders and loan programs have varying standards for DTI ratios. Most recently, Fannie Mae has expanded its maximum allowable DTI ratio to 50%.

Qualifying and verifying income are two different processes and lenders are the best people to ask about their rules. Speak with one today.

Click here to see the latest mortgage rates.

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.

Income Matters: How Much Is Required to Qualify for a Mortgage?