What is Debt-to-Income Ratio?
If you decided to buy one of the Florida homes for sale you'll need to know your debt-to-income ratio (DTI). Simply put, it is the calculation of how much of your monthly income goes to debt payments. Mortgage lenders look at the debt to income ratio to see how much they can lend you for a home purchase or mortgage refinancing. So while most people know about the importance of a credit score, just as important is your DTI.
What is the right debt to income ratio?
Banks have what's called the "28/43 rule." The first number (28) stands for the maximum percentage of your gross monthly income your lender will allow for housing costs. Home costs include the mortgage loan, mortgage insurance, home insurance, property taxes, and any homeowner’s association dues. These home costs are called PITI (principal, interest, taxes, and insurance). The other number (43) is the maximum percentage of your gross monthly income that a bank will allow for your housing expenses, as well as any recurring debt. Recurring debt means credit card payments, child support, car loans and other monetary obligations that are not short-term. But Note the federal “qualified mortgage” rules are the 43% maximum, though Freddie Mac, Fannie Mae and the Federal Housing Administrations all have exemptions allowing them to buy or insure loans with higher ratios. On July 29, 2017 Fannie Mae eased standards and bumped it to 50 percent maximum citing that using actual data from the last fifteen years shows borrowers with DTIs in the 45% to 50% range showed a significant number of them actually have good credit and not prone to default.
So how is your debt-to-income ratio (DTI) calculated?
Let’s say your combined gross earnings are $5,000 per month. $5,000 times 28% equals $1,400. The expense of your house (PITI) can't go over this dollar amount of $1,400. As for the other 50%, that figure would be $2,500. It's important to understand though you may have other expenses to the bank isn't counting on, like a car insurance, food, etc. and this is why it's important that you do your own budget when you go house shopping. Now if your monetary obligations exceed any of these amounts you'll either be denied for mortgage or qualify for lower amount. How much you’ll get (or not) really comes down to the lender you pick.
So if you decide to purchase one of the Florida homes for sale, it's important to look at your credit score, but also your debt to income ratio.