Exclusive Summary About Debt to Income Ratio by C.L. Haehl and Feseha George
Your debt-to-income ratio (DTI) is a calculation lenders use to determine whether you can afford a mortgage loan. This ratio is calculated by dividing your monthly debt by your monthly income to arrive at a debt-to-income percentage.
1. Front End/Back End There are actually two ratios that your lender will examine. First, you have a “front end ratio,” which is calculated by dividing your new monthly mortgage debt by your gross monthly income.
2. Excludes Expenses Not On Credit Report Your DTI only considers monthly expenses that report to the credit bureaus. Your monthly grocery bill, gas bill, phone bills, etc. are not considered.
3. Some Debts Can Be Removed Many people have debts on their credit reports that they do not pay, such as loans they simply cosigned for. This debt, technically, must be calculated into your DTI; however, many lenders will remove it if you can provide them with twelve month’s cancelled checks proving the debt is paid by someone other than yourself.
How High Income to Debt Ratio Leads to Foreclosure
A high income to debt ratio leads to foreclosures. Many people are facing foreclosure because they have adjustable rate mortgages. In an adjustable rate mortgage, your mortgage rate is not locked in so it can be changed at any time. Many homeowners got themselves in over their heads because they took on mortgages that they could barely afford; now their mortgage payments have increased and they cannot make the payments.
If these homeowners had a lower income to debt ratio then they would be able to afford their current mortgage payments. Most homeowners did not save a lot of money in case their mortgage payments increased.
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