What are debt-to-income (DTI) guidelines?
The Federal Housing Administration (FHA), which guarantees loans for first-time home buyers or those with lower credit scores, as well as many lenders use debt-to-income (DTI) guidelines to determine whether or not a borrower can afford a mortgage. To calculate the DTI ratio, take the total amount of your monthly ongoing and long-term debt and divide it by your monthly income. For example, an applicant with $3,000 in income and $700 in debt would have a DTI ratio of 23 percent. When calculating your DTI ratio include car loans, credit card payments and court-ordered child support. Expenses such as child care, utility bills, short-term debt to be paid down within 10 months, rent and current mortgage payments are not considered. In general, the FHA and banks prefer a DTI level or housing expense-to-income ratio of 43 percent or below. The lower the ratio, the better. When it comes to the first mortgage (including principal, interest taxes, insurance and homeowner’s association dues, if a
