7 Steps of the Mortgage Process

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What is Debt-To-Income and why is it important?  

A home mortgage calculator can be a great tool to estimate mortgage payments. Most mortgage lenders also use something called Debt to Income Ratio. The DTI Ratio, it is a real-estate term that describes a borrower’s monthly debt obligation compared to their monthly total income.

Debt-to-income determines the likelihood a borrower will repay a loan. However, It does not indicate the willingness of a person to make their monthly mortgage payment. More importantly, It measures a mortgage payment’s economic burden on an individual borrower or borrowers.

Mortgage Calculation of Income

The calculations are fairly simple for company employees if they receive no bonuses. In order to calculate the gross income gather the last month’s pay stubs and add the gross income from each check. Consequently, this becomes the monthly household income used in the calculation of DTI.

If bonuses are received, the lender averages a two-year history of the bonus amount. The average can be added to the monthly income figure for mortgage purposes.  If overtime is steady for the last year then it can be included but talk to a Mortgage 1 Inc. lender to double check.

Calculating the Debt Obligation

Calculating the monthly debt obligation is less straight-forward. Mortgage lenders split debts into two primary categories: front-end and back-end.

Front-end debts include payments to credit card and student loans. On the other hand, back-end debts relate to housing expenses.

To calculate the mortgage debt ratios, total the monthly figures below:

  • Minimum credit card payments
  • Car payments
  • Personal loan payments
  • Student loan payments
  • Child support and/or alimony payments
  • Any other monthly payment you are obligated to pay.

For the purpose of calculating Installment loans with less than 10 payments remaining. Those can exclude those from the debt-to-income calculation.  The result is what a mortgage lender would call the “front-end ratio”

Next, calculate the back end ratio includes the Mortgage payment plus the front end ratio. Take the total debt from the front end ratio then add in monthly mortgage payments (or the expected mortgage payments) plus other housing-related expenses.  With this in mind, other housing-related expenses could include real estate tax bill, homeowner’s insurance, and monthly association dues.

Calculating Borrowers Debt-To-Income Ratio

Finally, once the monthly income and monthly debt are totaled.  Simply divide the monthly debts into the monthly income.

Monthly Example Debt-To-Income Ratio 20%

  • Income: $20,000
  • Recurring debts : $1,500
  • Housing payment : $2,500

Monthly Example Debt-To-Income Ratio 45%  

  • Income : $4,000
  • Recurring debts : $1,000
  • Housing payment: $800

Therefore, under most circumstances, current mortgage programs require homeowners to have a Debt-to-Income of 40% or less. Use the home mortgage calculator above to further explore what is right for you.