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Quick Refresher on Debt-to-Income Ratios

October 3rd, 2011 11:55 AM

Traditional debt-to-income ratios (DTI) are 28% for housing debt and 38% for overall debt. Over the past 20 years, those standards have been relaxed to ratio requirements in excess of 40% and sometimes beyond 50% for conforming loans (currently, those equal to or less than $417,000). Most automated underwriting systems use a standard 45% threshold. But, there is no fixed rule because there are so many other compensating factors that lead to an underwriter’s (or even automated underwriter's) approval decision. We have had approvals over 60% before and declines for less than 40%. If the applicant has abundant assets, stable employment, and a high credit score, it will help the chances of getting an approval at the higher ratios.

As an example, if you are borrowing $400,000 for a home appraised at $500,000, which at the current zero-cost, 30-year fixed market rate of 4.25% equals a monthly payment of $1968, then add in property tax and insurance for a total monthly housing debt of about $2550. Assuming you have no other debt then your top and bottom DTI will be the same. Say your gross income is $6666 per month ($80,000 per year), which means your DTI is about 38.25% - well within the range of approval for a good credit, good equity borrower. If the ratios were closer to 45%, we would take a closer look at other possible revenue streams, choice of loan program (hybrid ARMs may require a higher qualifying rate) and your credit card debt. Even though borrowers may pay off credit card balances every month, DTI will factor in a percentage of the balances at the point in time when the credit report is drawn.