The "debt-to-income ratio" or "DTI ratio" as it’s known in the mortgage industry, is the way a bank or lender determines what you can afford in the way of a mortgage payment. By dividing all of your monthly liabilities (including the proposed housing payment) by your gross monthly income, they come up with a percentage.
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If DTI is too high, lenders won't be able to approve a mortgage. When considering a home buyer's DTI, they use the back-end ratio.
Zillow’s Debt-to-Income calculator will help you decide your eligibility to buy a house.
· A loan from your 401(K) does not count against your DTI. As a part of the process, your lender will need to see a paper trail following the funds. In this case, they need proof of receipt of the funds from your 401(K) and then proof of the funds being deposited in your bank account.
When you need a mortgage to buy a home, your mortgage lender is going to look at a number of different factors in order to determine whether or not to lend to you and for what amount that loan should.
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The debt-to-income, or back-end, ratio, analyzes how much of your gross income must go toward debt payments, including your mortgage, credit cards, car loans student loans, medical expenses, child support, alimony and other obligations.
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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).
Just this summer, Fannie Mae made it a little easier for people with higher debt to qualify for mortgages by raising the DTI to 50 percent from 45.
If you have a low debt-to-income ratio then you are seen as financially fit. If you need new capital for a car or vacation, for example, then you can take on the extra repayments with ease. Lenders look at the DTI ratio to make lending decisions. A low DTI means you are more likely to be approved.