November 28, 2016
If you are thinking about your FHA loan options in 2017, one area to pay special attention to (especially over the holidays) is your debt to income ratio (DTI). This ratio is one of the most important factors in the lender’s decision to approve or deny a home loan-it can be just as crucial as your FICO scores.
The debt to income ratio is a calculation your lender will make by taking the amount of verifiable income you have and comparing it with the amount of your monthly financial obligations. This ratio is calculated with and without your proposed mortgage payment in order to determine if you can afford the loan payments every month.
How does the lender make these calculations? According to HUD 4000.1, pages 177 and 178:
“The Mortgagee must review all credit report inquiries to ensure that all debts, including any new debt payments resulting from material inquiries listed on the credit report, are used to calculate the debt ratios. The Mortgagee must also determine that any recent debts were not incurred to obtain any part of the Borrowers required funds to close on the Property being purchased.”
Note the term, “material inquiries” above, which this section defines as follows:
“Material Inquiries refer to inquires which may potentially result in obligations incurred by the Borrower for other Mortgages, auto loans, leases, or other Installment Loans. Inquiries from department stores, credit bureaus, and insurance companies are not considered material inquiries.”
And how does your loan officer get your debt information? HUD 4000.1 instructs the lender, “The Mortgagee must determine the Borrowers monthly liabilities by reviewing all debts listed on the credit report, Uniform Residential Loan Application (URLA), and required documentation. All applicable monthly liabilities must be included in the qualifying ratio.”
Holiday spending can definitely increase your debt-to-income ratio, so borrowers who are moving out of the planning and saving stage of the home buying or refinancing process and into the application portion should keep these factors in mind when using credit cards or thinking about opening new lines of credit.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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