Debt to Income Ratio. Home Equity

Debt To Income AKA DTI, is the true factor of your current financial standing. This is the industry's standard for measureing your financal health. The Debt to Income ratio is calculated adding up all your monthly minimum bills & payments (excluding mortgage, food & entertainment) and dividing it into your Gross Income.

The formula will vary from lender to lender, but this will be an excellent gage to see where you are at financially. Some banks or lenders will calculate in the mortgage and will offset with a more acceptable ratios.
Debt Ratios (without Mortgage) of 10% or less is Great. Debt ratios of 20% or higher yeild a yellow light as unforseen emergencys can play a major role into the equation. For example, someone with a gross monthly income of $2,000 who is making minimum payments of $400 on debt (loans and credit cards) has a debt to income ratio of 20 percent ($400 / $2000 = .20).

When the 29/41 ratio is exceeded, the lender is responsible for explaining why it believes the mortgage is an acceptable risk on the Mortgage Credit Worksheet (MCAW) in the "Remarks" section.

The lender must include on the MCAW any compensating factors used in the loan approval. This does not apply for loans rated "acceptable" or approved by an FHA-Approved Automated Underwriting System.

To determine your maximum mortgage amount or Line of Credit lenders use guidelines called debt-to-income ratios. This is simply the percentage of your monthly gross income (before taxes) that is used to pay your monthly debts. Because there are two calculations, there is a "front" ratio and a "back" ratio and they are generally written in the following format: 33/38. The front ratio is the percentage of your monthly gross income (before taxes) that is used to pay your housing costs, including principal, interest, taxes, insurance, mortgage insurance (when applicable) and homeowners association fees (when applicable). The back ratio is the same thing, only it also includes your monthly consumer debt. Consumer debt can be car payments, credit card debt, installment loans, and similar related expenses. Auto or life insurance is not considered a debt.

Madison Hunter, Inc. is a licensed Real Estate Broker with the California Department of Real Estate License# 01444750