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In this video I explain everything you need to know about the debt to income ratio when applying for a mortgage, including what DTI is, how to calculate it, and what qualifies as a good debt to income ratio for various mortgage types.
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Most of you will not be able to figure out your debt to income ratio because if you're not using the right income calculation then all of the numbers that you were crunching are completely irrelevant and very likely to be wrong.
Good morning, good evening or good afternoon. Today's video is about debt to income ratio or mortgage debt to income ratio. So by the end of this video you're gonna have a better understanding of what it is, how it's calculated and why it's so crucial that not only you are super transparent with your loan officer but also that you find the right loan officer.
This is your one stop shop for anything and everything mortgage education. I drop new videos every Tuesday and Saturday. So don't forget to subscribe and hit the bell to be notified. My name is Stephanie Weeks and I've been a loan officer for 17 years and I've helped 1000s and 1000s and 1000s of customers with millions and millions and millions maybe even billions by now, in mortgage financing. My goal and my mission is to help spread mortgage education to help more people obtain the goal of home ownership.
This video is gonna help because you're better going to understand what types of mortgage you might qualify for. The different mortgages that are available all have different requirements. So if you better understand your information, you better understand what debt to income is. And you have a better understanding or just a basic grasp of how to calculate your debt to income. Which is not easy and it's not perfect but you're gonna have just a very, very general rule. Most people have this concept misunderstood and they're calculating the wrong things. Let's take control of your mortgage financing in today's video.
You are probably ready to dive in and today I'm gonna cover five different things. I'm gonna look at my cheat sheet cause it's early in the morning and my brain's not functioning just yet. Number one, what is debt to income ratio? Number two, what is debt to income ratio in relation to a housing ratio. Number three, how to calculate your debts income ratio number four, a quick overview of the different debt to incomes that they look for on the different loan types and number five, it is all case by case. So we're gonna talk about compensating factors as well as general guidelines. So hang in there with me, we’re covering five, let's dive in.
Number one, what is the debt to income ratio? That is your debt in relation to your income on a monthly basis. And also your minimum required payments, minimum. You may have a credit card and that minimum payment is $25, but you might pay 150. We're gonna use $25. So an example of your debt to income ratio would be, and I've got my handy calculator. Let's say that you have these are things that are reporting on your credits. So what you paid rent right now that's not gonna go into your DTI. Let's say that you have $25 to a Target card, minimum payment. Let's say that you have $35 to the JCPenney card, minimum payment. Let's say that you have student loan payments that's gonna be a whole other topic. A lot goes into this but student loan payments, let's say the lender's gonna use $300. And then let's say you have an auto loan of 425. So that is 785 if my calculator didn't just mess up cause I've pressed an extra button, but 785 that 785 a month is gonna go into your income. So let's just say it's 785 even if I calculated it wrong, it's okay. We'll keep moving. And your income is 4,000 that's a debt to income of 20%. So again debts, meaning debts reporting on credit and minimum payments. Now some things that don't report on credit is maybe you have an owner finance mortgage or maybe you did some type of bond for deed different things like that. But generally speaking debts that are reporting on your credit, minimum payment required not what you actually pay, but minimum payment required. And those numbers are taken in relation to your income.
One thing I did leave off is if we're calculating your debt to income for the purpose of purchasing a home your new house payment is gonna go into that. So let's say if your new house payment is a 1000, we have 785, we have an income of 4,000. That's a 45% debt to income ratio. That was number one, moving on to number two.
Are you ready? Cause I'm onto number two. What is debt to income ratio in relation to a housing ratio? Remember our numbers, we had 785 plus $1,000 house payment proposed house payment and a $4,000 in income. So we know what our debt ratio was because we just calculated that at 45%. What's the housing ratio. Well you probably would've guessed it by now. We're not gonna count those other debts we're just gonna count the proposed housing payment. That was a $1000. We had an income of $4,000. That's a 25% housing ratio, 25%. And that is your housing ratio in relation to your debt ratio, that was an easy one. Let's move on to number three.
All right number three how to calculate your debt to income ratio? Well, I have mixed feelings about this because I'm showing you the calculations we're gonna go through another example. Let me get my pen paper and my calculator. We'll go through another example but the problem is is that most of you will not be able to figure out your debt to income ratio because if you're not using the right income calculation then all of the numbers that you were crunching are completely irrelevant and very likely to be wrong. That is why it's so important that number one you are so transparent with your loan officer. Any and all income sources and whether or they're stable, whether or not they're consistent, whether or not they're likely to continue, things like that.
You're self employed, you have a lot of businesses. Make sure you disclose all of that as well. So they can calculate that income because of the income is not right the ratio is not right. And here's a very interesting fact. You have the income that you put in your bank you know how much money you get into your bank, okay? You make that much that's real life. But then also you have income that's reported to the IRS that's taxable. So you might have income reported to the IRS, but then there's the taxable portion of that income, those numbers they are not exactly the same, right.
Then you of course have income based on the employer. What I pay employees cost me a lot more than what they receive. So that's another version of pay. Of course, that's not the one that lender's gonna use but I still wanna express that that's also something else to be considered and to just know, knowledge is power right or applied knowledge is power. Someone recently told me. And the other thing is then you have qualifying income. So we have actual real life money in the bank, cash deposit. We have taxable income from the IRS, we're gonna throw out the employer for this example. And then we also have qualifying income and those items don't match. And for those of you who think you can look at your adjusted gross on your tax return and know thats your income, nope, I wish so much that it was that easy as a lender to calculate employment income. No, not at all. As a lender to accurately calculate your income I don't even look at the adjusted groups. I calculate everything else. We look at every line item, every dollar, every explanation what it goes into there are things added back, there are things subtracted out it is not, not easy. That's why you gotta trust your lender and get a really great lender.
So let's go ahead and assume that you were able to calculate your income or you have a lender and they've told you what your income is. So either way, we're now assuming that we have income. Let's say that our income is let's go with, what am I feeling? How about 3,500 a month. Okay, we're gonna calculate your debt to income. Let's say a $900 monthly payment, that's gonna be our proposed house payment. Let's say that we have $75 to Target credit card. Maybe we have $40 to a Care Credit Card. What else do people have? Maybe they have $35 to Best Buy. What else do I see all the time? Oh, don't forget an auto payment, a lot of people have that. Let's say it's $325 and then let's say student loans, qualifying payment to be $100. That is $1,475 and then divide that by my $3,500 that gives me a 42% debt to income ratio. Now, another important thing is that when you're calculating your debt to income ratio you have to know what lenders are gonna use. If you have loans or when they're revolving or installment whatever you have debt, shall I say on your credit and it does not report a monthly payment. There are different methods that the lender can use to one either assume that payment amount or to verify that. If that is missing, the lender can not accurately calculate your debt to income nor can you, in that example.
One other thing is when it comes to student loans those payments are calculated based on the situation. Sometimes it's based on balance, sometimes it's based on actual, sometimes it's based on percentages. And each percentage is different for each loan type and even conventional which is one loan type, there's Fannie and there's Freddy and their rules do not match. So there's also a difference on how they'll calculate your student loan payments. Get a good loan officer, because this is a lot for you to try to figure out on your own. But I at least want you have the basic information. We are gonna move on to our next one, which is number four. Okay, so you may or may not know, but we have FHA loans, conventional loans, RD loans and we have VA loans. Even with conventional there's Fannie and there's Freddy so sometimes there's variations while there's definitely variations on their guidelines. But, I wanna give you just some reference points of the different loan types and what the debt to income ratios that they would love for you to have but also what I've seen approved, even if you don't fit in that perfect box, which most of us don't fit in that perfect box.
So let's see, we have FHA. They would love for you to have a housing ratio of 28% or less. Gosh, those get approved really great. They would love for you to have a debt to income ratio of 45% or less. That's very, very helpful as well. However, I have personally seen FHA approved debt to income ratios up to around 55% total debt. And I've seen them approve housing ratios in the low 40s With conventional. They would ask absolutely love to see you have a housing ratio of 28% or less, and the overall debt ratio of 45 or less. But again, like I mentioned earlier, Fannie and Freddie are different. I've actually seen overall debt ratios approved up to 49% and I've also seen housing ratios approved in the low 40s as well. That was FHA, then we touched on conventional.
Now we're gonna move on to RD or Rural Development. They in my opinion seem to have the tightest box to fit in. They want you to have a housing ratio of around 28%, but it is a big struggle that I have found if your ratio for your housing exceeds 31, they just really really don't want that. The overall debt to income ratio for RD, they really, really want you at 41% or less. It's very different than the other programs 41% or less on that total debt ratio. And I've seen them approved around 43% and last but not least thank you so much to all my veterans, all of our veterans for your service.
VA loans, which are some of my favorite because I just really believe that that's the least that we can do for our veterans is give them a fantastic loan. With VA they're not super picky on the housing ratio they're really not. I think the highest I've seen them approve on a housing ratio is probably in the 40s, it's not coming perfectly to mind right now but I think it's probably in the 40s (phone dinging). Sorry about that just ignore that little ding there. And the overall debt ratio of actually I have actually seen them approve as high as 65%. That seems a really, really high, but VA takes a lot of other things into consideration with debt ratios than some of the other programs. And a VA loan has some of the lowest default ratios of all of the programs. So don't knock it too bad for allowing that high debt ratio, obviously they do know what they're doing.
We are gonna move on to number five, which is last but not least, we're gonna talk about compensating factors. With each and every program and the, so the guidelines or the information I've given you today. As you can see, it is not a perfect, perfect box and an exact hard and fast rule. Guidelines are guidelines, they're not hard and fast rules, they're guidelines. They have some gray area in there, okay. And if you were ever teetering within the allowable range, let me explain. If you show up with a 70% debt ratio, forget it. They're not approving a 70% debt ratio. I don't care if you're putting down 70% on the property, it still has to make sense. So let's assume that you were in the range of what is acceptable, but you're pushing the envelope. Compensating factors will bring you sometimes from not approved to being approved.
What are compensating factors? Let's dive into that now. Compensating factors, those are things like maybe you've been on your job for a long time, a long time is not a year or two years. That's good and that's stable, but many years, several years, right. Four or five I would say is my opinion. So you've been on your job for a long time that's great stability.
Maybe your housing ratio is really high but your overall debt ratio is really low in comparison. And so sometimes that can be a comp factor. Another thing might be maybe you have a lot of savings or what we call reserves in the bank after closing. That means if you need 10,000 to close, but you've got 40,000 in retirement and 10,000 in your checking. Well, you're gonna have 40,000 left after closing that you can pull for a rainy day. That would be another compensating factor. So we've got ratios, we've got reserves, we've got job time. We've got low debt in relation to the high housing ratio. I'm trying to think, what else am I forgetting? I feel like I'm forgetting something else. Oh, I've thought of another one. Okay, what about payment shock. What that is is payment shock is let's say your rent is 1,400 bucks and now your house, that's gonna be 12. That's awesome if you've been paying 1400 on time and we can verify that. That's a compensating factor, that's another example. I've created a guide for you I'm gonna drop the link below. It's just a quick little chart that I've made that references the different loan types and the debt ratios and housing ratios that I have seen work to get loans approved.
Type WIN in the comments below if you think that you can now better win at the mortgage game after having watched this video. Thank you so much for watching this video today. I'm gonna drop a couple of other links to some other videos that you may enjoy and reach out. I would love to get a direct message from you, answering all your questions directly. I really enjoy the questions, I love hearing your success stories as well. So don't forget to share those. My Insta is _therealstephanieweeks. Oh, I can't even say my own name. And then my Twitter, which I always have to cheat is @LoanLady_steph, that's a mouthful.
