The Woodlands Mortgage Expert: What is Debt To Income- DTI?

Debt-to-Income (DTI) is a lending term which describes a person's monthly debt load as compared to their monthly gross income. Mortgage lenders use Debt-to-Income to determine whether a mortgage applicant can maintain payments a given property. DTI is used for all purchase mortgages and for most refinance transactions. It can be used to answer the question "How Much Home Can I Afford?" Debt-to-Income does not indicate the willingness of a person to make their monthly mortgage payment. It only measures a mortgage payment's economic burden on a household. Most mortgage guidelines enforce a maximum Debt-to-Income limit. How do lenders calculate monthly income? Mortgage lenders calculate income a little bit differently from how you may expect. There's more than just the "take-home" pay to consider, for example. Lenders perform special math for bonus income; give credit for certain itemized tax deductions; and apply specific guidelines to part-time work. The simplest income calculations are applied to W-2 employees who receive no bonus and make no itemized deductions. For W-2 employees, if you're paid twice monthly, your lender will take your last two pay stubs, add your gross income, and use this sum as your monthly household income. If you receive bonus income, your lender will look for a two-history and will average your annual bonus as a monthly figure to add to your mortgage application. For self-employed borrowers and applicants who own more than 25% of a business, calculating income is a bit more involved. To calculate income for a self-employed borrower, mortgage lenders will typically add the adjusted gross income as shown on the two most recent years' federal tax returns, then add certain claimed depreciation to that bottom-line figure. Next, the sum will be divided by 24 months to find your monthly household income. Income which is not shown on tax returns or not yet claimed cannot be used for mortgage qualification purposes. In addition, all mortgage applicants are eligible to use regular, ongoing disbursements for purposes of padding their mortgage income. Pension disbursements and annuities may be claimed so long as they will continue for at least another 36 months, as can social security and disability payments from the federal government. As always, our qualified mortgage loan officers are always a step ahead of you and ready to assist you at anytime. Give us a call 281-907-6401 or visit our website at TxPremierMortgage.com for more information.