If you are looking to apply for a home loan, there are a number of things that you should know going in that will give you a better idea of if you will be approved. Most buyers know that they should be taking a look at their credit report and score, but what lenders are looking at more and more is a borrower's debt to income ratio.
According to the Washington Post, credit-risk managers said that a sub-par debt to income ratio is the top reason for denying a loan request. Researchers found that nearly 60 percent of risk managers had debt to income ratio as their number one concern. The problem is most potential home buyers do not know exactly how their DTI is viewed.
There are two parts to a DTI, and each of them is calculated differently and weigh on your ability to secure a home loan. The first part is your gross income before taxes versus the estimated monthly housing cost (including principal, interest, taxes and insurance). The Washington Post reports that lenders do not like to see the housing cost above 28 percent of gross income, and the average is around 22 percent for those who get approved.
The second part is the back-end ratio, which is your monthly income versus your monthly recurring debts, such as credit cards, car payments and student loans. The maximum is usually around 43 percent, though the average hovers between 34 and 41 percent depending on the lender and whether or not it is an FHA loan.
If you are looking to learn more about your debt to income ratio and what loan options will work best for you, it is a good idea to speak to a qualified mortgage banker who can help guide you through the process.