What Debts Make Up The Debt-To-Income (DTI) Ratios?

What Debts Make Up The Debt-To-Income (DTI) Ratios?

Earlier this week I wrote a blog titled Fannie Mae & Freddie Mac 3% Down Payment Mortgages in which I disagreed with critics who claim low down payment mortgages were a major cause of mortgages failing in the past 10 years. In the blog I pointed out it was not low down payments that caused mortgages to fail but the Debt-To-Income (DTI) Ratios Borrowers were allowed to go to, as well as Borrowers who did not have a good payment history being allowed to qualify for mortgages. At one point in the last decade Borrowers were allowed to use up to 67% of their Total Income in qualifying for a mortgage and have credit scores in the low to mid 500's. The combination of these two things were the reason for the failed mortgages, not the low down payments.

After writing the blog I thought it would be a good idea to further explain in detail What Debts Make Up The Debt-To-Income (DTI) Ratios? But before I do let me first start out by stating the Consumer Financial Protection Bureau (CFPB) QM Rule presently limits a Borrower's DTI to not be higher that 45%. However, the CFPB will soon lower the Total Debt-To-Income Ratio to 43% on all Loan Programs. This is a far cry from the 67% which once was allowed.

A Debt-To-Income Ratios is the Percentage of the Borrower(s) Monthly Debt versus the GROSS Monthly Borrower(s) income. In other words the Borrower(s) Debt divided by Borrower(s) Income = Debt-To-Income Ratio (DTI). For example if the Borrower(s) have $2,000 in Monthly Debt, and $5,000 of Monthly Income:

$2,000/$5,000 = .40% DTI

Every Borrower(s) has TWO Debt-To-Income Ratios:

  • The first is the Housing Ratio, known as the "Front or Top Ratio"
  • The second is the Total Debt-To-Income Ratio, known as the "Back or Bottom Ratio".

The following is what is included in each Ratio. As I list each debt which is calculated into the Debt-To-Income Ratio's, I will indicate if the debt is just specific to a particular Loan Program.

Housing Ratio more commonly known as the "Front or Top Ratio" consists of:

  • The Loan Principle & Interest
  • Property Taxes
  • Homeowners Insurance (hazard insurance)
  • Homeowners or Condo Association Fees (HOA) Note: only if the property is located in a development that has a Homeowners Association.
  • Private Mortgage Insurance (PMI) - Only on Conventional, or USDA Rural Loans. Note: There is no PMI on Conventional Loans if Borrower's Down payment is 20% or more.
  • Monthly Insurance Premium (MIP) - Only on FHA Loans
  • Down payment Assistance Loans
  • Second Mortgage, Line of Credit, if it is done at the same time as the First Mortgage.

Total Debt-To-Income Ratio more commonly known as the "Back or Bottom Ratio" consists of all the debts that were included in the Housing Ratio plus:

  • All Monthly Revolving Debt such as:
    • Credit Cards
    • Loans such as:
      • Car Loans
      • Student Loans
      • Personal Loans
      • Second Mortgage, Home Equity, & Line of Credit if not done at the same time as the First Mortgage, or was done at the same time but is being subordinated on a new loan.
  • Child Day Care - Only on VA Loans.
  • Child Support Payments
  • Alimony Payments
  • Existing Mortgage Payments (second home, investment property, etc.)

There are exceptions for some of the above debts if they only have a certain amount of payments left, or if a loan is being deferred, which is common of student loans. But as a general rule, the above debts will be include in the Total-Debt-To Income Ratio.

As you can see there are several monthly debts which are not calculated into the Total DTI Ratios such as:

  • Food
  • Clothing
  • Gas
  • Utilities
  • Entertainment
  • Federal & State Income Taxes
  • Charitable Contributions

There are other debts not figured in the Total DTI Ratios, but these make up the larger ones. As you can see the taxes we pay in Federal & State taxes alone will take at least 25-30 percent of our income. If DTI Ratios were allowed to go up to 67% of GROSS Income that left Borrowers with 3-8 percent of their income for all the other things you see on the list above.

It does not take a rocket scientist to figure out this was a receipt for failed mortgages, especially when you throw in they already had a history of not paying their bills. By the way it was the government who force Lenders to lend at such high DTI Ratios. If Lenders denied a loan to a Borrower because they did not like how high the DTI Ratios were, but the Borrower was within the allowed DTI Ratios, the Lender was open to a Banking Commission complaint, and a law suite for discrimination.

I hope I have been able to provide the above information on what a Debt-To-Income (DTI) Ratio is, and What Debts Make Up The Debt-To-Income (DTI) Ratios in not only an easy to understand format, but also in a way which makes it clear why so many mortgages failed in the past.

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Info about the author:

George Souto NMLS# 65149 is a Loan Originator who can assist you with all your #FHA, #CHFA, and #Conventional #mortgage needs in Connecticut. George resides in Middlesex County which includes #Middletown, #Middlefield, #Durham, #Cromwell, #Portland, #Higganum, #Haddam, #East Haddam, #Moodus, #Chester, #Deep River, and #Essex. George can be contacted at (860) 573-1308 or gsouto@mccuemortgage.com

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