Finding out if you will be able to qualify based on your current income level is the first step in the refinancing or purchasing a home process. For a conventional loan, you must make enough so your back-end DTI ratio does not exceed 43%.
I’ll go over the minimum income requirements with you so you can determine how much you need to be eligible for a mortgage. In the event that you require a lender who will permit a higher DTI ratio, I will outline the available programs and options. Then, I will review the optimal payment and mortgage scenario for wealth building. First an education on how it is all calculated.
Dreaming of buying a home but worried your 55% DTI might be a dealbreaker? Don’t fret just yet! While a high DTI can make securing a mortgage more challenging, it’s not an insurmountable obstacle With the right strategies and a bit of planning, you can still achieve your homeownership goals.
Understanding DTI and Its Impact on Mortgages
The debt-to-income ratio, or DTI, calculates the percentage of your monthly income that is used to pay off debt. It’s an important consideration for lenders when determining your suitability for a mortgage. Although lenders typically prefer a DTI of 2043% or less, some may be accommodating to borrowers with compensating factors such as excellent credit or significant savings. (2016)
A 55% DTI falls outside the typical range, making it harder to qualify for a conventional mortgage. However, there are options available, and we’ll explore them in detail.
Navigating the Path to Homeownership with a High DTI
1. Explore Government-Backed Loans:
FHA and VA loans are designed for borrowers with moderate to lower credit scores and higher DTIs. FHA loans allow a DTI of up to 57%, while VA loans can be approved with a DTI as high as 60% in some cases. These loans offer more flexibility and require lower down payments, making them attractive options for borrowers with a high DTI.
2. Consider a Co-signer:
A co-signer with good credit and low debt-to-income ratio can greatly increase your chances of getting approved. The co-signer essentially guarantees the loan, making lenders more comfortable with your application.
3. Lower Your DTI:
Even though it might take some work, doing this can greatly increase your chances of getting approved for a mortgage with a lower interest rate. Concentrate on reducing high-interest debt and boosting your revenue via side gigs or professional growth.
4. Shop Around for Lenders:
Different lenders have varying DTI requirements and may be more open to working with borrowers with higher debt ratios. Compare offers from multiple lenders to find the best fit for your financial situation.
5. Be Prepared for Higher Interest Rates:
With a high DTI, you might face higher interest rates compared to borrowers with lower debt ratios. However, remember that even a slightly higher interest rate can be offset by the long-term benefits of homeownership.
Additional Tips for Success:
- Boost Your Credit Score: Aim for a credit score of at least 620 to qualify for the best loan terms.
- Save for a Larger Down Payment: A larger down payment reduces the loan amount and demonstrates your commitment to responsible borrowing.
- Gather Documentation: Be prepared to provide lenders with proof of income, assets, and debts.
- Work with a Mortgage Broker: A mortgage broker can help you navigate the loan process and find the best mortgage options for your situation.
Remember, with careful planning and the right strategies, you can overcome a high DTI and achieve your dream of homeownership. Don’t hesitate to reach out to a mortgage professional for personalized advice and guidance. They can help you assess your options and develop a plan to make your homeownership dreams a reality.
What is the DTI – Debt to Income Ratio?
Lenders use the debt-to-income ratio, or DTI, to calculate how much mortgage you can afford based on your current income level. Lenders actually have two DTI calculations… the front-end DTI and back end DTI. The back-end DTI is the one that matters most when qualifying for a mortgage.
- Calculating your proposed monthly mortgage payment (PITI, or principle, interest, taxes, and insurance) and dividing the result by your gross monthly income is the front-end debt-to-income ratio. Should your monthly mortgage payment be $2000 as proposed and your monthly gross income be $6000%, your front-end debt-to-income ratio would be 2033 percent ($2000 divided by $6000).
- Back End DTI Ratio: To calculate your back-end DTI ratio, divide your gross monthly income by the total amount of your monthly obligations, including your proposed mortgage payment. In addition to any minimum monthly payments that appear on your credit report, you will also add your proposed monthly payments. This covers minimum credit card payments, auto loan payments, student loan payments, and any other monthly obligation that is displayed.
Your back-end DTI is calculated by adding up all of these monthly payments and dividing the result by your gross monthly income. For conventional loans, the preferred maximum back end DTI is 43%. That being said, you should target 36%-38% as a more comfortable back end DTI ratio.
How much do I need to make to Qualify for a Mortgage?
Now that you know how to calculate your back-end DTI, you are on your way to knowing how much you need to make to qualify for a mortgage. What you really need to determine is how much mortgage you can afford. That is one of the first things to consider before buying a home.
The taxes on the house you are looking at is one of the important aspects that is frequently disregarded. You will be able to afford a more expensive home if the taxes are low. High property taxes will hurt your chances to qualify.
I advise you to use a basic mortgage calculator and enter an interest rate that is marginally higher than what you might be seeing listed online by lenders.
High Debt to Income Ratio Mortgage | Top 4 Options
FAQ
Is 55 a good debt-to-income ratio?
Can I get a loan with 50% DTI?
Is 50% DTI too high?
Can I get an FHA loan with 50% DTI?
Can I get a mortgage with a DTI below 36%?
In general, lenders are looking for a DTI below 36%, but you can still get a mortgage with a DTI above this number. DTI is calculated by adding up all your monthly debt payments and dividing that by your gross monthly income. Not every monthly expense is part of this calculation. See the table below for what to include and exclude.
Can you get a mortgage with a 55% DTI?
It’s possible to get a mortgage with a 55% DTI, but you’ll need to have an otherwise strong application, and you’ll likely be limited to government-backed mortgages. For example, FHA loans potentially allow DTIs up to 57%.
What is a good DTI ratio for a mortgage?
For instance, if you spend $3,000 on rent or a mortgage and earn $10,000 a month, your front-end DTI would be 30%. Back-end DTI is the go-to ratio for most mortgage applications. It’s a broader measure, capturing not just housing costs but all your monthly debt obligations — student loans, car payments, and credit card bills.
Can I get a mortgage if my DTI is 45%?
In some cases, your DTI can be in the mid-40s and you will still qualify for a mortgage. That said, if your DTI is around 45%, you’ll need a very high credit score and down payment to balance it out. If your DTI is over 50%, there is little chance a lender will approve you for a loan.