Debt to Income Ratio

[StartingOver10]

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@pdog661 wrote:

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@HYPASS33 wrote:
Is DTI figured on how much credit you have available to you or on the balance you used compared with your income?

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DTI (debt to income) has 2 parts.   Front end, and back end.  Both are ratios of your income to debt.  They look at this on a monthly payment basises.

The front end ratio is a max of 28%, and the back end ratio is a max of 45%.  The front end is a little less strick for lendors then the back end rato. 

Lendors look at all all of your monthly debt payments and your mortgage payment, which includes escrow, and they determine if the ratio is below 45%.  If so, then you can move forward with the mortgage process.

For example if you make 1000.00 per month and have 0 monthly debts you could afford a 450.00 mortgage payment.  

If you make 1000.00 per month, and have a 100.00 car payment then you could afford a 350.00 mortgage payment.

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Your maximums are not accurate. The actual FHA ratio maximums are much higher - I'm not saying that the buyer should go higher, but many lenders will. The ratio maximums you are quoting are reasonable.  The actual max for front end is 45.99% and for back end 56.99% (way too high in my opinion, but it is what it is). Of course, your individual lender could have more restictive ratios, like your lender. So when you are shopping lenders,make sure to ask what their individual max ratio's are so you know if you are working with a very conservative lender or not. I have had many of my clients close with back end ratio's over 50%

[HYPASS33]

So basically I can have 27,000 avail credit avail to me but if I'm only using 2-8% of that avail credit then I should be fine on a mortgage loan. Only thing I'm concerned about is do they look at how new those credit limits are and if so how long should they age before going for loan?

[StartingOver10]

They aren't looking at your available credit per se.

They are looking at your gross income and your debt and the new house payment.

What is your gross income?

[HYPASS33]

52000

[StartingOver10]

The most important thing to remember is that you want to not only qualify, but you want your payment to be "comfortable" for you to make. If the payment is too high, even though you qualify, it will make the entire process more difficult.

I am going to assume you are W-2 type so that is your actual gross. (The answers are different if you are 1099 type or self employed. Use your adjusted gross instead).

Take your gross income and divide by 12 to get your gross monthly income.

Estimate the monthly payment on the new purchase (principal & interest; real estate taxes, insurance, mortgage insurance and HOA/condo fees if applicable)

You can estimate your P&I by going to a mortgage calculator and put in the amount you are borrowing and the current rate. You will need to look up taxes for your area and estimate hazard insurance and mortgage insurance. Divide that figure by your gross income and that will be your front end ratio.

Add the housing figure to your total monthly debt payments (min credit card payments + installment loans) and divide by the monthly gross; that is your back end ratio.

For $52k income using FHA ratios, the absolute maximum monthly payments you can have including new house payment and your current debt is $2469/month. But I don't recommend anywhere close to that on your income and some lenders will restrict your back end rato to 50% or less. Each lender has their own overlays. Your max front end ratio is $1978 (that would be the new house payment maximum). Naturally, a lower payment is better than going to the max.

If you prefer, just call a mortgage banker in your area to have them run the ratios for you. They can do that without pulling your credit. Get a referral from your Realtor, your friends or family.

[HYPASS33]

Ill be way below that on Monthly payment. I'm in SC and you can get a really nice house here newly built for 175,000-2000,00. My payment range on 175 would be roughly 900 a month or lower. But you agree it's best to wait for accounts to age?

[StartingOver10]

You can get a pre-approval now if you have the savings to purchase the home you are looking at $175k to $200k.

The $900 you quote is probably just P&I. Expect it to be a little higher with taxes and insurance and mortgage insurance. But you certainly seem to be in line to apply now.

[BrownBee]

That's the point...we don't have any personal concerns that we could make a mortgage payment that's less than the current rent payment ($700) we make. Maybe I need to clarify my statement. I don't understand why the bank wouldn't qualify us for a mortgage that would be less (including taxes at the homestead rate and home owners insurance...USDA doesn't require PMI) when we have not trouble making all the aforementioned payments. 
Yes, I know the car payment is high. It is not an extravagent car...a base model 2011 Ford Fusion. The only reason we even bought a car in the first place was because our 2000 Dodge Intrepid kicked the bucket. It would have cost more to repair than the car was worth. Not a good financial move by anyone's estimate (I hope). 
USDA requires no down payment, and the seller pays closing costs. I see no reason to pay a down payment, closing costs, and PMI if it isn't necessary. 

[HYPASS33]

I want to go the way where I have to put the least down. You can't get a FHA loan at 100% anymore can you? Also aren't there non profit places to help with down payments or something. I have about 5000 to put down but the less I have to the better.

[BrownBee]

USDA requires no down payment, no PMI, and the seller can pay all closing costs. I think your inspection fee can even come out of your earnest money. VA also requires no down payment if you're a qualified Veteran. 
The Keystone Challenge fund comes to mind for first time homebuyer down payment assistance.