The question: “how much home can I afford?” The answer: it depends on your DTI. “DTI” stands for Debt To Income ratio and it’s relatively easy to calculate (see calculator below). You add up your total monthly debt obligations and then divide that number by your total gross monthly income. The “tricky” part to this formula (aside from knowing what the DTI has to be) is knowing what debts to count and what to use for Qualifying Income.
Every programs has a different guidelines for DTI. Conforming Loans typically have a 45% maximum limit for DTI, while Government Loans (like FHA, VA, and USDA) can allow for higher DTI ratios with an automated approval from their underwriting system. Jumbo Loans are the most conservative and have a 43% DTI maximum. Call us if you’re not sure what program is best suited for you.
Debts To Count
Here’s a basic run down of what debts to count when calculating the DTI.
If it’s on the Credit Report then you count it. The exception to this is if there is legal documentation (like a divorce decree) that allows us to exclude the debt. Another exception could be that if it’s an installment loan (like a car that you own) and there are only a few payments left on it (i.e. less than 10 months) then you can most likely exclude that debt.
If it’s court-ordered debt then you have to count it. Examples for this include child support, alimony, IRS tax lien payments, etc. These items will not appear on a credit report so please disclose this to us up front. Note: if you don’t disclose these debts we will ultimately discover them during the process based on documentation and third-party verification so it’s best to discuss these debts in the initial stages.
Notice we did not include utility bills, cell phone bills, cable bills, tithes to the church, auto insurance, etc. These items do not have to be included in the DTI calculations for qualifying as they do not appear on a credit report. We will provide you a copy of your credit report when you apply for a mortgage with us.
For the “normal” salaried, W2 individual the income is relatively simple: take the before-tax figure and use that for monthly income. If you’re contract labor (i.e. taxes and insurance are not withheld from your paycheck) you can still use that gross income figure; however, you’ll want to check your tax returns to see if you have any offsetting tax deductions to consider.
Commission, Bonus, and Overtime: if you receive commission, bonus, or overtime then you’ll most likely have to figure a two-year average for those figures unless the income is declining from year to year, then you’ll have to use the most recent year’s income to be conservative.
Other Income: Social Security, Pension, VA Disability, etc.. Any income that is consistent and likely to continue for three years or more can be counted. You’re welcome to use the pre-tax amount and if you receive the money tax-free then you can gross up that amount equal to your tax bracket. Obviously you’re welcome to call us if you have any questions.
If you’re self-employed then you’ll want to check out Self-Employment Income Analysis and use it as a guide for what to use for Qualifying Income. We honestly recommend just calling us and having us do the calculations for you to ensure they’re correct.
Debt to Income Calculator
For this DTI calculator you can simple delete the fields below and enter your own information. We have these example figures to illustrate how to use the calculator and what types of data are required. You’re also welcome to export or download a copy to your computer if you wish. (And if you’re worried about computer security then just make your own spreadsheet as it’s not difficult).