What Is the Debt-to-Income (DTI) Ratio?
05/04/2018 Jerrica Kowcheck
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Debt-to-income (DTI) ratio isn’t as talked about as often as your credit score, but it’s just as important when seeking a home loan. So what goes into DTI? It’s the amount of recurring monthly debt you have compared to your monthly gross income.
For instance, if you have monthly gross income of $5,000, and recurring monthly debts totaling $1,500, your DTI ratio would be $1,500 divided by $5,000 or 30%.
DTI is important when you’re applying for a mortgage, a refinance, or other types of home loans. DTI indicates how likely you will be able to repay a loan, and helps lenders determine if you’re a worthwhile financial risk. In other words, it guides their determination of whether or not to approve you for the loan.
What Is considered a Good DTI Ratio?
In general, most lenders view a DTI Ratio of 35% or less as ideal. DTI Ratios between 36% and 49% are riskier because less income is left over after bills and other expenses have been paid. DTI Ratios above 50% are considered as high-risk. The higher your ratio, the less likely you are to be approved for the loan you seek.
PennyMac offers conventional loans for DTI ratios of up to 45%, possibly 50% in certain instances. There are other types of mortgages that allow higher DTI described below.
How to Calculate Your Debt-to-Income Ratio
To figure out your DTI ratio, follow these steps:
- Total your monthly payments for:
- Real estate taxes
- Homeowner’s insurance
- Student loans
- Credit cards
- Personal loans
- Child support
- Other recurring debts
- Total your monthly gross (pre-tax) income. Income includes:
- Tips and bonuses
- Social security
- Child support
- Other additional income
- Divide your total monthly debt by your total monthly income.
- Multiply the answer by 100 to get your DTI ratio percentage.
Note:Do not include monthly payments for groceries, utilities, car insurance or medical insurance premiums.
Debt-to-Income for Specific Loan Types
Some mortgage lenders allow for a higher DTI ratio, as noted below. These ratios are general, but could vary according to individual circumstances. For example, if you have high cash reserves, a large mortgage down payment or high FICO score, the lender may accept a higher DTI ratio. Find out which loan type is right for you.
FHA Loan DTI
If you’re a first-time homebuyer and have a higher range DTI, an FHA loan may be ideal. There are some FHA-insured loans that allow up to 50% DTI, but 41% is typically the maximum.
VA Loan DTI
A VA loan is reserved for U.S. service members, veterans and their spouses who are purchasing a home. Some of the benefits with this type of loan include: no down payment, no mortgage insurance, and low interest rates. The DTI ratio is limited to 41% or less in most cases.
USDA Loan DTI
USDA loans offer no down payment and very low interest rates for eligible rural homes, but they are for low- and very low-income applicants. Debt-to-income ratios are limited to 41% in most cases. However, if you have a credit score over 660, stable employment or can prove a demonstrated ability to save, the DTI may be increased. The DTI requirements are also less strict for USDA Streamline refinancing.
Jumbo Loan DTI
You found your dream house, but it’s higher than the conventional loan limit for your state. A jumbo loan may be an option. However, you typically need a high credit score, a low debt-to-income ratio, and cash reserves.
DTI for Home Equity Loans and HELOCs
If your house is worth more than what you still owe on the mortgage, congratulations: You have equity in your house. If you have enough of it, you may be able to convert that equity into either a home equity loan, or a home equity line of credit (HELOC)—a revolving line of credit—to pay for those repairs or updates. The DTI caps at 43% and 50%, respectively.
A Good DTI Results in a Better Loan
Buying or remodeling a house is a big commitment. Monitoring your debt-to-income ratio so you can work on lowering or keeping it in the ideal range of 35% or less is financially smart. Not only does a lower DTI give you more loan options, but it could also save you money by lowering your interest rate.
Contact a PennyMac Loan Officer for more information or to discuss which loan option is right for you.