What’s a debt-to-income ratio, and why you need a low one to buy a home


This article is too good not to be shared so it’s copied from The Washington Post.

When it comes to qualifying for a loan to buy a home or to refinance your mortgage, there are plenty of numbers to consider, such as your credit score and the appraised home value. Perhaps one of the most important numbers is your debt-to-income (DTI) ratio, which compares the minimum payments on all debt you must make each month with your gross monthly income.

“The DTI ratio is one of the most important considerations lenders take into account when evaluating the risk associated with a borrower taking on another payment,” says Paul Buege, president and chief operating officer of Inlanta Mortgage in Pewaukee, Wis. “The lower the DTI ratio a borrower has, the more confident the lender is about getting paid on time in the future based on the loan terms.”

It’s not just the lender who benefits from knowing your DTI, says Buege.

“Calculating your DTI ratio can help you determine how comfortable you are with your current debt and whether you have enough income to take on a mortgage payment,” he says.

Your DTI tells a lender what percentage of your income is being consumed by debts, says Joseph Mayhew, chief credit officer of Evolve Mortgage Services in Frisco, Tex.

“Lenders like to see low DTI ratios because it means a borrower has excess income to cover unforeseen emergencies and to save for a rainy day,” says Mayhew. “As DTI ratios go higher, lenders become less willing to lend. In the eyes of a mortgage lender, a high DTI can signify poor credit management, living beyond your means and difficulty saving money for the future.”

How to calculate your DTI

A simple DTI calculation is to divide your total monthly obligations by your total monthly income to generate a percentage, says Mayhew. For example, if your total monthly debts are $1,000 and your total monthly income is $4,000, your DTI would be 25 percent.

However, not every monthly bill is included in your DTI.

“Lenders typically look at installment loan obligations, such as auto and student loans, as well as any revolving debt payments such as credit cards or a home equity line of credit,” says Buege. “Alimony and child support payments are also included. When calculating DTI ratios, lenders don’t include utilities, cable and phone bills or health insurance premiums. Medical bills are generally not included. Everyday items like food and gas are also not included when calculating DTI ratios.

Your mortgage payments, including principal, interest, taxes and insurance, are contained in the DTI calculation, but auto insurance and life insurance payments, 401(k) contributions, income tax deductions and college or private school tuition payments are not, says Mayhew.

What’s a good DTI?

While an ideal DTI would be 25 percent or less, says Buege, the lower the DTI the better. Various loan programs have different DTI ratio requirements.

“For consumers with a good credit history, stable income and a down payment of 5 percent or more, most lenders will easily lend up to 45 percent DTI,” says Mayhew. “Those with smaller down payments or problems in their credit history may find themselves limited to a DTI around 38 percent.”

If your DTI is between 45 and 50 percent, many lenders will still approve a loan, says Mayhew, but they will require a perfect credit history, a larger down payment of 20 percent or more and plenty of cash in the bank for an emergency. Applicants with a higher level of debt will usually need to reduce their debt and/or increase their income.

What Credit Score do You Need to qualify for a FHA VA KHC USDA Kentucky Mortgage


minimum credit score I need to qualify for a Kentucky FHA, VA, USDA and KHC Conventional mortgage loan
What is the minimum credit score I need to qualify for a Kentucky FHA, VA, USDA and KHC Conventional mortgage loan

getting approved for a Mortgage Loan in Kentucky for 2020
getting approved for a Mortgage Loan in Kentucky for 2020

dap requirement 2020

What Credit Score do You Need to Buy a Home?

When it comes to mortgages and credit scores, there are two really important questions to ask:

–What credit score do I need to qualify for a mortgage?

–What credit score do I need to get the lowest interest rate on a mortgage?

These different but related questions are important if you are looking to buy a home. And the second question is particularly important. With a high FICO score, you can literally save tens of thousands of dollars in interest over the life of a home loan. So let’s take a look at both questions. And if you don’t know you score, be sure to get you free credit score.

What credit score do you need to qualify for a mortgage?

The first thing to keep in mind is that qualifying for a mortgage involves a lot more than just a credit score. While your FICO score is a very important ingredient, it is just one factor. Lenders also look at your income and level of debt, among other things.

As a rule of thumb, however, a credit score below 620 will make buying a home very difficult. A FICO score below 620 is considered sub-prime. In the past there were mortgage companies that specialized in sub-prime mortgages. Because of the challenges in the credit market over the last year or so, however, sub-prime loans have become difficult if not impossible to obtain.

A FICO score between 620 and 650 is considered fair to good credit. But keep in mind, this range of credit scores does not guarantee you will qualify for a mortgage, and if you do qualify, it won’t get you the lowest interest rate possible. Still, to buy a home aim for a score of at least 620, recognizing that other factors weigh in the decision and that some banks may require a higher score.

What credit score do you need to get a low rate mortgage?

It use to be that a score of about 720 would yield the lowest mortgage rates available. Today, the best rates kick in with a FICO score of 760. And interest rates go up significantly as your credit score drops. To give you an idea, the following table shows current rates by credit score and calculates a monthly principal and interest payment based on a $300,000 loan:

When applying for eligibility for A Kentucky  FHA Loans, There are some factors taken into account:
  • Credit score 620 and above with the mortgage investors we work with, even though FHA will insured lower credit scores, most mortgage lenders will create overlays
  • No bankruptcies (Chapter 7) in last 2 years with clean credit afterwards and 3 years after a foreclosure or short sale
  • 3.5% Down payment. Can be gifted or money saved-up or money taken out of 401k or retirement account. No cash gifts or unsourced deposits are allowed for down payment on a FHA loan.
  • Debt to income ratios can be up to 55% on an Approved Eligible Files but restricted on manual underwrites to 31% and 43% respectively.
  • Overtime or bonus income needs to show a 2 year history for it be eligible for income qualifying on a FHA loan. FHA underwriters typically will take a 2 year average.
  • FHA appraisals with the new changes now call for the FHA appraiser to check and review the home more thoroughly, hence the typical costs of a FHA appraisal has gone from $325 to $425 due to more legwork involved on a FHA appraisal.
  • Any disputes on credit bureau will need to be taken out of dispute status typically for your credit scores to be validated, so please be aware of this.
  • Rent references are usually not called for unless your file get downgraded to a manual
  • FHA mortgage insurance the upfront and annual mi monthly fee is for life of loan.
  • A lender may approve a borrower if:  acceptable payment history and  no major derogatory credit on revolving accounts in the last 12 months. “Acceptable payment history” means:  the borrower made all housing and installment debt payments on time for the previous 12 months, and  there are no more than two 30‐day late mortgage or installment payments in the last 24 months. “Major derogatory credit” means:  payments made more than 90 days after the due date, or  3 or more payments made more than 60 days after the due date.
  •  Child support income is Allowed If using a voluntary payment agreement, the lender:  obtains 12 months canceled checks, deposit slips, or tax returns.  For divorce decree, legal separation agreement, or court order if there is evidence of receipt for the most recent 6 months, may use the current payment to calculate income, &  if there are not 6 months of consistent payments, may average the income received over the prior 2 years, or less if the income has not been received that long  4000.1 II.A



Joel Lobb
Senior  Loan Officer
(NMLS#57916)
text or call my phone: (502) 905-3708
email me at kentuckyloan@gmail.com
The view and opinions stated on this website belong solely to the authors, and are intended for informational purposes only. The posted information does not guarantee approval, nor does it comprise full underwriting guidelines. This does not represent being part of a government agency. The views expressed on this post are mine and do not necessarily reflect the view of my employer. Not all products or services mentioned on this site may fit all people. NMLS ID# 57916, (www.nmlsconsumeraccess.org). Mortgage loans only offered in Kentucky.
All loans and lines are subject to credit approval, verification, and collateral evaluation and are originated by lender. Products and interest rates are subject to change without notice. Manufactured and mobile homes are not eligible as collateral.