What Is the Debt to Income Ratio to Refinance a Home?
A debt-to-income ratio shows your fixed monthly debt obligations as a percentage of your pre-tax income. Lenders and mortgage insurers establish debt-to-income ratio maximums, and if your debt-to-income ratio exceeds these limits, you cannot refinance your home. Typically, you must have a debt-to-income ratio of 45 percent or less to refinance a mortgage, although some lenders cap debt-to-income ratios at less than 40 percent.
Other People Are Reading
-
Income
-
When calculating the income part of the debt-to-income ratio, lenders look at recent pay stubs to determine the gross monthly income of salaried employees. If you are self-employed you must provide the lender with two years of tax returns, and the lender will determine your average monthly income by dividing your average annual income by 12. You can also use income derived from rental property if you have lease agreements with renters and evidence of at least 12 months of steady rental income. Other types of allowable income include pension payments and Social Security income.
Debt
-
Your lender checks your credit report, which shows details of your current monthly debt payments. The lender also includes your homeowners insurance premium, property tax and, if applicable, your mortgage insurance premiums in the debt equation. If you have to make alimony or child support payments, lenders normally add these payments to your debt. Your utility bills, grocery expenses, cable television bills, phone bills and other discretionary expenses are not included as debts in your debt-to-income ratio.
-
Housing Ratio
-
Aside from your debt-to-income ratio, lenders also cap your housing ratio when you are attempting to refinance. Your housing ratio consists of your mortgage principal and interest payments as well as your homeowners insurance and property tax payments. If you obtain a federally insured loan, your housing ratio cannot exceed 31 percent of your gross income. On most other loan products, housing ratios are limited to 28 percent of your monthly income. Your lender can deny your application if either your housing ratio or your debt-to-income ratio exceeds acceptable levels.
Considerations
-
Lenders sometimes disregard normal underwriting practices for homeowners who are having problems making their mortgage payments. If you owe more than your home's current worth, your lender may agree to a workout loan, which involves modifying your existing mortgage to make payments more affordable. People who are struggling to pay a mortgage after a job loss often have debt-to-income ratios in excess of 50 percent even after a loan modification. Lenders do not write new loans with such high debt-to-income ratios, but modifications are done on a case-by-case basis.
-
