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Chrisman's Corner: A Primer on Debt-to-Income Ratio

Through all the changes in the mortgage industry, at least one thing remains constant: the borrower agreeing to pay the creditor (JMAC) back. After all, why would anyone make a loan to someone who was not going to pay it back? With more and more first time home buyers entering the market, the question JMAC’s brokers are occasionally asked is, “How much should my payment be?”

JMAC’s underwriters do their best to judge what the borrower is qualified to pay – borrowers need to establish what they are comfortable paying. What a borrower is qualified to pay is generally fairly simple to answer as it is the result of a mathematical equation within guidelines that establish a limit for what is known as the debt-to-income ratio, or DTI. The DTI is a calculation that determines what percentage of gross income are the total housing payment and/or the total housing payment plus the total monthly debt payments. The total monthly housing payment is termed PITI: Principal and Interest on the mortgage, property Taxes and homeowners Insurance and homeowners association is a condo or townhome.

The figure is usually expressed with two numbers, the top and bottom DTI ratio could look like this: 35/42 which means that a borrower’s total housing payment, PITI, is 35% of their gross income and 42% is the PITI plus credit card payments, car payments, student loans, and other debt that appears a borrower’s credit report.

Most programs do not set a limit for the top ratio, just PITI as a percentage of income, but all have a limit set for the bottom or total DTI ratio. For the most part any loans associated with the Federal Government, therefore set by the CFPB (Consumer Financial Protection Bureau), limit a borrower’s DTI ratio to 43% with some exceptions. Other JMAC programs outside of the government allow for higher DTIs – ask your AE for more details.