Improving your debt to income ratio (DTI) when applying for a mortgage

When I talk to customers about getting a mortgage, they’re often concerned about their credit score, which is an indicator of their ability to pay back loans and can affect the rates they’ll be able to get. While credit scores are certainly important, what they often don’t know is that another number, debt-to-income ratio (DTI), can play an even bigger role in their ability to get a mortgage. In fact, a high DTI is the #1 reason mortgage applications get rejected1. So what's a DTI, exactly? Your debt-to-income ratio is all your monthly debt payments divided by your gross monthly income. I’ll get into the specifics of this calculation next.

Most lenders typically offer loans to creditworthy borrowers with DTIs as high as 43-47%. That limit is based on policies by government-backed lenders like Fannie Mae, put in place to protect customers against predatory lending practices. As of July 29th, 2017, we are working with Fannie Mae to offer loans with DTIs of up to 50% for creditworthy borrowers2. However, the lower your DTI, the more financing options will be available to you. Let’s look at what goes into calculating that number.

How DTI is calculated

On the one hand, the math for calculating your DTI is simple – we add up what your monthly debt will be once you have your new home (such as student loans, car loans, credit card bills, and your future mortgage payment) and divide it by your gross monthly income (how much money you earn before taxes).

The tricky part about calculating DTI is that there can be several moving parts.

For example:

  • If you haven’t found your new home yet, we won’t know your exact mortgage payments, property taxes, or insurance payments, so we’ll have to estimate.
  • If you already own a home, we’ll need to include both your future and current mortgage payments as debt (unless the purchase of your new home is contingent on the sale of your old home).

In addition, when we calculate income (the other half of the DTI equation), we use conservative calculations because we want to make sure you get a mortgage that’s affordable, now and in the future.

For example:

  • If you’re self-employed or compensated by commission or RSUs, we may not be able to count all 100% of that income, given that these forms of income tend to be less consistent.
  • If you are self-employed, it’s typically beneficial to write off your business expenses to lower your tax bill. But those tax deductions may also lower your qualifying income, since underwriters are looking at your net (not gross) income.
  • If you have rental income from an investment property, we’ll need to see that income on your tax returns (or rental checks if your taxes haven’t been filed yet) and we’ll only be able to use a portion of that income to be conservative.
  • If you plan on turning your current home into a rental property, you’ll need to have a lease agreement in place for us to consider the potential income.

We can help give you clarity about your DTI

At Better, our goal is to give you as much certainty as we can, as soon as we can, about how much you’ll be able to get financing for.

When you get our 3-minute pre approval, we run a soft credit check (which doesn’t affect your score). This allows Loan Consultants like me to look at your debts and credit in more detail and get a more accurate picture of your DTI.

If you’re planning on buying soon, we also encourage you to upgrade to our verified pre-approval. Our underwriting team will review things like your tax returns, pay stubs, and any other documents specific to your financial situation, so we can tell you exactly how much you are qualified to borrow. This helps ensure there aren’t surprises about your DTI when you do apply for a mortgage.

We may have more options based on your situation

Traditional lenders have been slow to offer financing options that fit with today’s times. We’ve partnered with Fannie Mae to offer financing options for a wider range of scenarios.

For example, there are several instances where we may be able to use income from another person living with you to qualify for your loan, without adding them as a co-borrower on the loan, such as:

  • If you’re unmarried but live with your partner (and plan on living with them in your new home)
  • If you plan on having extended family living with you, such as a parent
  • If you currently live with a roommate and plan on renting out a second bedroom to them in your new home

In addition, if your new home has an additional unit that you plan on renting out, we may be able to include some of that future rental income in your DTI calculation.

Ready to explore your options?

We can help you understand your DTI and the financing options available to you. Start by getting your 3-minute pre approval. Then schedule a call so we go over the numbers with you.