How to Calculate the Monthly Debt for a Mortgage Application
With the banishment of stated income loans or "liar's loans" as they were called, the accurate calculation of the monthly debt (debt-to-income ratios, or DTI) is more vital than ever. All major loan programs have maximum DTI requirements that, if exceeded, will cause a lender to decline the loan, regardless of the other strengths the file possesses. There are actually two DTIs, a front and a back. The front refers to the cost of the mortgage payment alone when compared to the gross income. The back is the cost of all debt, including the mortgage payment when compared to gross income. The debt-to-income ration expresses these numbers in percentages.
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Instructions
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Accurately Calculate the Ratios
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Calculate the gross monthly income. The mortgage industry uses standardized calculations for salaried and stable hourly employees (40 hours per week). If the borrower is hourly and works a normal work week, multiply the hourly wage by 40, then multiply the sum by 52 and divide by 12. For example $15 per hour would be 15 x 40 = 600 x 52 = 31,200/12 = 2,600. If the borrower is paid a bi-weekly salary (every other Friday for example) multiply the salary by 26 and divide the sum by 12. If the borrower is paid semi-monthly (first and the 15th of each month) multiply the salary by 2.
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2
Analyze the credit report. The debt-to-income calculation must include all loans the borrower has. The exception to this rule is if an installment debt (a car loan for example, not a line of credit or lease) has less than 10 months remaining, or if someone else is making the payments and has been for the most recent 12 months. Depending upon the program, deferred student loans may be excluded, so check your program guidelines for this. Add up all of the borrowers' debt, including the new mortgage payment.
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Divide the total mortgage payment amount by the total gross income. This will give you the front end DTI. Calculate the back end DTI by dividing the entire amount of all the payments by the income. If the borrower earns $2,600 per month, the new mortgage is $795 a month, has two credit cards with total minimum payments of $80 and a car loan for $295 the DTI is 30.57/45.00 (795/2600 = 30.57, and 795 + 80 + 295 = 1170/2600 = 45.)
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Tips & Warnings
For self-employed income use Fannie Mae form 1084. This income is much more complicated to calculate and even seasoned underwriters occasionally need help ensuring all income is counted correctly. If the figures do not make sense, have another person look at them.
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