Debt to Income Ratio for Mortgage Qualification
Reader Question: What is the highest debt to income ratio that most mortgage underwriters will consider?
Let me start with some basic definitions for those who aren't familiar with this subject. As you might have guessed, your debt-to-income ratio (or DTI) is a comparison between the amount of debt you have and your gross annual income. It is typically expressed as a percentage.
For example, if your gross income is $200,000 per year, and you pay $25,000 per year toward your debt, then your debt-to-income ratio is just over 12 percent. That's the percentage of your gross income that goes toward your debt each year ... more or less.
A mortgage underwriter is the person who reviews the applicant's financial situation to give an approval or disapproval for the loan. In other words, the underwriter determines the level of risk involved with making a loan to a person, based on that person's credit score, financial history, debt-to-income ratio and other factors.
With those definitions out of the way, let's address the question at hand. Traditionally (and in this context, "traditionally" means prior to the current economic crisis), mortgage lenders and underwriters preferred to see a debt-to-income ratio of 25 - 30 percent or lower. That was a general rule of thumb that applied in most cases.
And then came the subprime loan crisis, which soon devolved into the full-blown economic crisis we have now. As a result of this mess, mortgage lenders have basically shifted all of their lending criteria upward. Home buyers today need better credit scores to qualify for mortgages than they did a few years ago. And the debt-to-income ratio is scrutinized more closely as well, but it's only one piece of the larger puzzle.
With that being said, there is no "cut off" that I can offer you. I can only say what the rule of thumb was in the past, and that things are tougher all around these days. The preferred DTI will vary from one lender to the next.
On top of that, many lending institutions -- the ones who haven't collapsed already -- are scurrying around in "self preservation" mode at the moment. So their lending practices and their underwriting criteria are in a state of flux. The debt-to-income limits they had a year ago may be different today.
The only way to find out whether or not a lender will qualify you is to apply for the loan. You can start application the process through LendingTree by using the "Find a Mortgage Loan" link in the upper-right menu area. It's an easy way to get offers from up to four lenders.
Let me start with some basic definitions for those who aren't familiar with this subject. As you might have guessed, your debt-to-income ratio (or DTI) is a comparison between the amount of debt you have and your gross annual income. It is typically expressed as a percentage.
For example, if your gross income is $200,000 per year, and you pay $25,000 per year toward your debt, then your debt-to-income ratio is just over 12 percent. That's the percentage of your gross income that goes toward your debt each year ... more or less.
A mortgage underwriter is the person who reviews the applicant's financial situation to give an approval or disapproval for the loan. In other words, the underwriter determines the level of risk involved with making a loan to a person, based on that person's credit score, financial history, debt-to-income ratio and other factors.
With those definitions out of the way, let's address the question at hand. Traditionally (and in this context, "traditionally" means prior to the current economic crisis), mortgage lenders and underwriters preferred to see a debt-to-income ratio of 25 - 30 percent or lower. That was a general rule of thumb that applied in most cases.
And then came the subprime loan crisis, which soon devolved into the full-blown economic crisis we have now. As a result of this mess, mortgage lenders have basically shifted all of their lending criteria upward. Home buyers today need better credit scores to qualify for mortgages than they did a few years ago. And the debt-to-income ratio is scrutinized more closely as well, but it's only one piece of the larger puzzle.
With that being said, there is no "cut off" that I can offer you. I can only say what the rule of thumb was in the past, and that things are tougher all around these days. The preferred DTI will vary from one lender to the next.
On top of that, many lending institutions -- the ones who haven't collapsed already -- are scurrying around in "self preservation" mode at the moment. So their lending practices and their underwriting criteria are in a state of flux. The debt-to-income limits they had a year ago may be different today.
The only way to find out whether or not a lender will qualify you is to apply for the loan. You can start application the process through LendingTree by using the "Find a Mortgage Loan" link in the upper-right menu area. It's an easy way to get offers from up to four lenders.
Labels: Home loans
posted by Brandon at
4:28 PM
