Homebuyers looking to purchase a home need to understand what their debt to income (DTI) is in order to properly qualify for a home loan. Our mortgage loan officer experts are here to share all the details about DTI and homeownership in this Homeownership Insights™ podcast episode.
Introduction:
Welcome to the Homeownership Insights Podcast, your leading mortgage podcast. Sponsored by Fairway Independent Mortgage Corporation. Listen. As experts from across the country share knowledge to help homebuyers and homeowners make the best decisions in their homeownership journey. Our next podcast begins right now.
Casey Morris:
Welcome back to the Homeownership Insights Podcast. I'm Casey Morris. And today I'm talking with two Fairway loan officers, Chris Gonzalez and Sharla Ellis. And we're going to be talking about debt-to-income ratio, which is something that is really important to know about if you are planning to buy a home because it affects whether or not you qualify for a mortgage. But it can be difficult to understand if this is the first time that you're hearing it or the first time that you hear it is when you go to apply for a mortgage. So, Chris and Sharla are going to illuminate exactly what DTI is, what you need to know, and hopefully you'll come away from this feeling much more empowered about something that's really important to your homebuying journey. So Chris and Sharla, thank you so much for being here. So, I thought we could start if you guys wouldn't mind just talking about what exactly is debt to income ratio and why does it matter for getting a mortgage and how do you guys calculate it?
Chris Gonzalez:
All right. Well. Debt to income ratio. Yeah. It's a really important part of how an underwriter makes a decision on how and whether you qualify for a mortgage. But it it's a calculation of your what your mortgage payment is going to be, plus any obligations you currently have, like Carlisle to credit card payments. That's the minimum payment. And it's divided into your monthly income, the gross monthly income. And that number no needs to be. Depending on the program you're using between 45 and 50 on a commitment alone to go a little higher on a VA or a an FHA type loan, which is sometimes we use that when let's say someone's DTI might be a little bit high because they have some big car loans or leases or maybe they're paying the lease for a family member, you know, and it's not the real debts that they have on monthly basis do not write those checks. But sometimes that can hurt, that can hold somebody back. So, you know, using other programs to help them qualify sometimes comes in handy.
Sharla Ellis:
I wanted to state that on the income used, it's qualifying income for example, a borrower might think they have the income from their primary job or a second secondary job or other sources. But sometimes the rules and regulations don't count that a second job, you need to have it for two years or a self-employed borrower. We may look at an analysis different than they would. So, it's important to get with your lender quickly and early in the process so that you know what income they will use is typically gross for a W2 borrower hourly, we average some hours and self-employed. We run through some analysis. We can add some things back so income can get a little tricky, but we use whatever the guidelines allow whenever we qualify. Like Chris said, I always say everybody is approved of 45% and sometimes we can go to 50 or a little higher. And so, it's a guide. We do count beds that are we don't count grocery shopping and things like that. We do count the fixed debt, housing payments and auto loans and student loans, alimony, child support, tax liabilities, payments, the IRS, things of that nature. So again, the lender will know and can help and guide you on how to calculate a true debt ratio and where you'd qualify for the maximum payment.
Chris Gonzalez:
Yeah. To put it into practice a little for you, let's just say that we qualify your income to be $5000 a month, like a $60,000 a year salary. That means that you're in in the best-case scenario, mortgage payment, your car loans, your credit card payments. Can all that can all equal about $2500 a month. Let's give you an idea of how it applies to typical math. So, the mortgage might be, let's say, with mortgage taxes and insurance and away anything that has to do with the monthly principal interest, taxes and insurance on property, let's just say the 1800. That means your car payments and your credit cards, and everything can't be more than about $700. Just to give you an idea of how it would be calculated.
Sharla Ellis:
We can help you walk through those numbers. Any of you on a good, trusted loan officer can help guide you.
Chris Gonzalez:
There are ways also to look. I always recommend to anybody who's considering buying a house to get in as early as possible. You know, six months, three months, six months, whatever. You know, don't wait until you actually have a contract and a house to speak to somebody cause, you know, mortgages. Buying a home is the biggest transaction a lot of people ever make. And, you know, just talking to Casey before start the call that, you know, you sit down with, you know, an a professional to consider your will you get a consultation or you sit down with a financial planner, consider how retirement's going to go. You should sit down with a mortgage professional to go over what the payments might look like. An attractive price range you're looking at and what are how much money you need and how you want this. The key thing, how you would structure that room to make sure you get the loan on the home that you're desiring. There's a lot of things you can do. You know, if there's an issue, let's say there's an issue with your debt-to-income ratio. There are things that you can do to help get that under control and get yourself ready to for the approval. And it's much easier when you have more time.
Casey Morris:
And the benefit of doing that, starting early, talking to a loan officer and talking about your debt-to-income ratio and what you need to do to get it to where you can actually qualify. In a lot of cases, the things that you might do, like paying down debt, would theoretically help your credit score as well. And having a better credit score allows you to apply for or to qualify for more loan options, potentially a better interest rate. So it's really a win-win when you do start early and you get all of your ducks in a row instead of trying to kind of guess or wait until you're you think, okay, I'm ready to buy. And then you dove in and then, who knows, you could have been in a better position if you had worked with a loan officer earlier on. Or you may realize that you do still have some work to do. And so now it's another six months before you can buy. It just seems like always just talk to a loan officer as soon as you're even thinking about getting a mortgage.
Sharla Ellis:
I wanted to mention one of the things is being able to plan with a borrower to look at their debt, look at their income to determine how comfortable they are with their debt, decide, okay, is this your price range that you're comfortable with or what is the right credit choice for them and to talk about? All right. These interest rates are a little higher, so that affects affordability. But what can we look at on a budget situation? Where is there something we can eliminate that you could qualify to become a homeowner and start building wealth through real estate? I love going through the financial literacy experience with the borrower and just help them understand and be more aware of what's happening with budgeting and how can we get them there, what the possibilities are. And it's just as fun for me as it is for them, you know, that's rewarding to be able to help someone figure it out and become a homeowner and just start on that path to building wealth in Charlotte.
Chris Gonzalez:
I'm sure you find that it's fun, as I do, to look at a person's situation and help construct what their what their monthly obligations will look like after the mortgage is in place. To give you an example, I guess what I mean is, you know, let's just say that we have that situation year $5000 in income and then the 20 $500 a month limit. Well, there are many times when I believe in that, because you know what? Let's put it this way. There are many times where, you know, someone will say to me, hey, I'm going to put 20% down and save up and do as much as we can on that. And to get to the 20% and they come in with a lot of debt, but then they have 20% debt. And I've shown I'm sure you have to show where you can put 10% down, pay off the debt and your monthly payment on the mortgage is a little higher, but you actually qualify for a lot more house just because the monthly obligations can be so much higher on that short term debt. You know, when you put when you put it a 30-year lease that you're looking at, even though you are taking a bigger loan, you qualify for more simply because you restructured how you handle your debt to.
Sharla Ellis:
Qualify for more for or there's the ability to have that discretionary income, additional discretionary income, if you've paid off some debts or whatnot to put the savings or whatever. So this is just where it's exciting. The possibilities are endless when you start speaking with somebody who can guide you and in working it together. So.
Chris Gonzalez: Absolutely.
Casey Morris:
I was just going to say, I think to you, one of the interesting things for home buyer is when you do start looking at those debts and you start to find out, okay, this is what I qualify for under this circumstance, or if you can see the different possibilities. One of the things too is when you see the numbers of what your monthly obligations are going to look like with your potential housing payment based on how much you qualify for. You can start to really think, what are you comfortable with? Because you might qualify for more than you expected. But when you see what your monthly debts are going to be, you might think, okay, I could get the $500,000 house, but I'm going to cap my budget at $400k or at $350k because I'll feel more comfortable now that I can see those numbers. And you really can't conceptualize how much you're going to be paying every month or whether that's going to be a pinch or how that's going to affect your other financial goals until you do talk to a loan officer, and they help you and go through those numbers. So, I think that can be really illuminating and kind of bring everything back down to earth.
Chris Gonzalez:
No, absolutely. You know, we were budget counselors on some level at some point through the transaction. And there's a lot of tools that.
Sharla Ellis:
There are a couple of situations as well when someone really when we uncover some goals and objectives and really what's behind the numbers where it might make sense to purchase a home when one's debt ratios might work out, we bring a co-signer on, and you never want to set anyone up for failure. But in these situations where you might have a spouse that's unable to be on the loan, that they're a breadwinner as well, or you've got a second job that we can't count, but you do have that income coming in and we're pushing debt ratios, or we get a cosigner involved too, so you can purchase that house and start being a homeowner. There are situations where it makes sense that we can do things with elevated ratios. Otherwise, we want to be very careful and not have a borrower be over their head in a payment. And that's kind of where the fun is speaking with a customer and what can we tailor to help make work your objectives?
Casey Morris:
Yeah, and one thing I wanted to ask you both about, because I think this is a big concern for a lot of people who are looking to buy a home now is how does student loan debt affect their debt-to-income ratio and their opportunities to buy a house? And I know Christy had mentioned that student loans are calculated into DTI, but can you talk a bit about how they're calculated in. And, you know, I think the picture isn't as bleak as people assume that it's going to be because they think about their total number of debts. And a lot of people have a lot of debt. And they think, well, I can't buy a house not realizing that it's more about the monthly payment instead of that one big number.
Chris Gonzalez:
That's right. That is I have a lot of clients who come to me and say said something like, well, I already owe $100,000. So how much more they loaned me? You know, and I've made that point that it's really more about what that monthly payment is. And obviously, there's a lot of ways that that that there's a lot of ways to calculate what a monthly payment can be. You know, one would be, well, the credit report says you're paying 500 a month or so and others would be where there is no payment listed on the report. So, depending on the program we're using, we're going to use 1% of the debt as a monthly payment or a half a percent. And then there are some people who are on income-based debt repayment programs where that that they pay a lot less than, what, a 1% payment or a half a percent payment would be. It can really range. And, you know, again, this goes to going back to getting reviewed. I still look at everything over and see where you're at. Certainly, don't count out the possibility of buying a home just because you owe whatever you owe on the credit on the student loan.
Sharla Ellis:
Yeah, I agree with that. Some are scared and nervous and others think, Oh, I have been in forbearance or whatnot on the student loan. We don't want to count it. So that's where we'll come in and just guide and judge and figure out what program is best and how we can get you there.
Chris Gonzalez:
And you know, you know, an argument might be, well, I don't want to go to even more debt. You know, I'm buying a home because, you know, now I have the student loan and the mortgage and also have to keep in mind that homes are really more than just a place to live. It's more than just a debt. It's an asset and it's an appreciating asset. When you go around to looking at the top 1%, have a top half percent, top 1% to 5% of people in the country with a net worth of 68% of their net worth tends to be real estate. So, you know, it's no secret that owning a home is a is a path toward wealth over the course of time. You can appreciate that the student loans just simply by living in your house for the next ten or 15 years. You know, I'm assuming you have a very big student loan, of course, in that case, because it doesn't take long. So it's still a good idea. You know, every month you're paying something toward the principal and you're paying it down. Obviously, this tax deductibility on the interest. There's a lot of positives that that help you make that debt, that help you on the on how quickly you actually have in a rent versus buy situation that that that the rent even if it's lower per month that the buy ends up being a better idea only in about 2 to 2 and a half years simply because of this depreciation and amortization pay down and that in that interest. I mean I'm sorry interest that the tax benefits. No, it's still a great idea. So even if you owe a lot on a student loan. But buying a home might be a good idea. They'll pay them off.
Casey Morris:
It is really great perspective to get it to people because it can be really overwhelming to look at your student loan debt. And yeah, I think, as I say, $100,000, who's going to give me a mortgage? But, you know, or thinking, you know, it's just too much. I don't want to take on any more debt. But if you put it in that context of looking at it a few years down the road and what you're really talking about, it's not just, you know, sort of looking at those initial numbers on paper, but how is this going to affect your wealth building opportunities for the foreseeable future? It really changes the conversation.
Chris Gonzalez:
And doesn't take a either. I mean, like if I have $500,000 house and appreciate, let's say 5% a year, just around the average, you know, in four years you have another $100,000 in equity and a half. You just paid off student loans, or at least you have the equity it paid out. So, you know, this just gives the idea. It doesn't like it takes long. And all you do is live in the house and make the payments, which you're going to do on the rent. But in the case of rent, you just help the landlord pay off his student loans.
So it's a it's a worthy cause to figure out how to get it done. It's going to it's going to make a big difference in life over the course of the next X amount of years they own.
Casey Morris:
And to that end, obviously, you know, I totally agree. You know, because what you guys are saying, you know, talk to somebody early, help have them help you come up with a plan if you are thinking about buying a house. But do you guys have any general tips for somebody who may be listening to this, who's thinking, okay, I want to get started. But, you know, they sort of have a sense that their debt-to-income ratio is going to be high because of student loans, because of credit cards, and maybe they have a car payment or some taxes or whatever it is. And they're feeling like, okay, how do I start making moves now? You know, any general tips towards getting that DTI where it needs to be to qualify?
Sharla Ellis:
Yeah. In fact, I was thinking about this while Chris was speaking. You have borrowers who might be nervous or not knowing where to start, and we just need to start. Call your favorite trusted loan officer and they can walk you through. Make sure you tell them everything and they can help put you on a plan. Now, we're not speaking about credit scores right now, but Airways Credit Tools Department is so wonderful. If someone's credit is not where it needs to be, we can help get there. So just knowing and starting somewhere and get them get the borrowers on a path to homeownership is quite wonderful. Chris, what would you add to that?
Chris Gonzalez:
I simply agree and say that getting in with a loan officer who can look everything over is just a great way to make a plan. You know, we've talked about everything that is beneficial about buying a home. Even if you're thinking about it, get in with somebody and there's so much that can be done regarding that. And that's the thing about going to the doctor. You know, you fill out some information and then, you know, and you sit in a room and the nurses come in, you know, take your blood pressure. To me, this is how I explain it. When you're sitting in that waiting room and you're filling out that info, that's filling out the application, and when you're sitting in the doctor's office and in the actual exam room and they come in to take your blood pressure, that's the paperwork. So now that the doctor has the paperwork and the information, they can make an analysis about what you need. That's really what you need for on the mortgage. And the analysis is that that thing comes out of this. Plenty of things that you can do to reduce that debt to income or it just like we were saying before, just create a plan to handle it. Sometimes they can hire a loan, but it you think but there are other things you can do. You know, if you wanted a direct example, my one might be sometimes with let's say if a person has a limited amount of money, you can borrow from a 401k which we'll give you, will lend you up to $50,000 or 50% of what you have in there and give you a much longer term when you when you use that money for the purposes of buying a home and that could help with your down payment closing costs. But, you know, for the purposes of buying a home which allows you to use the money that you do have, the let's say, consolidate that so that at the end of a little plan like that, you know, where you where you need to be to qualify, you know, your monthly obligations might even be less than what they are now. And they're all the time with clients who are paying $3000 a month. And I'm in New York, so the values here and prices are crazy. But so many renting homes, doing one right now is renting for $4100 a month, which is kind of normal for a house right now. And the mortgage for you, it's going to be about $4700 a month after we're all said and done. But he currently has about $1500 a month in applications, and I use that idea of paying down some stuff to bring that 1500 down to about 200. And so, you know, at the end of the day, he used to be paying or currently paying 40, 150. That's a lot of math. That's 5600 a month. And the new mortgage for you is going to be 4700 plus 200, an obligation. So he went from 5640 950, owns a home before he was renting. So this, you know, little mix and match and little, you know, play with numbers. It's amazing what you can do.
Casey Morris:
Yeah, I mean, that's a huge difference. And to then be able to own a home as well and start building equity, it's kind of a no brainer at that point.
Chris Gonzalez:
Absolutely. I mean, imagine saving what I say, 700 a month. And and on top of that, you're building equity every month. And, you know, a nice chunk of that mortgage payments going toward principal values, going up every day. You know, it's just a no brainer, right?
Sharla Ellis:
Great points. Great analogy of the doctor's office.
Casey Morris:
Yeah, I like that. And I think it's true, too, because whenever you go to the doctor and you are worried about something so often, once you get past those initial stages and you talk to the doctor, there's a relief that comes with knowing what the situation actually is and what the treatment plan is. And I think it's the same with financial decisions, especially with buying a home where you if you're worried that it's not going to happen for you or that you're just it's going to take you years, you go and get some real information and have a plan and all of a sudden things start to come together and you feel like, okay, I can do this, and now I know what I need to do in order to get there instead of, you know, being in your own head and just making assumptions.
Chris Gonzalez:
Too. True. That's a great point. There really is a lot of client to leave with this exhale almost like, well, not only can I do it, but it's going to be better. Like, you know, it's first thing when that happens, it's really wonderful. And everyone deserves that. Everyone deserves that.
Sharla Ellis: Exciting. Makes us excited just thinking about it.
Chris Gonzalez: It does. It really does the best part of my job.
Casey Morris:
Yeah. It's a great thing, you know, when people realize that homeownership is truly within their grasp when they thought maybe it was years away or not even a possibility.
Chris Gonzalez:
Yeah, that's it. With these last few recommendations, one of the first ones I would say, don't save, don't wait, save 20% down, don't wait that you just don't need to you know, you'll gain that inequity in a matter of couple of years. Getting this wonderful program available, we can put 3% or 5% down and get, you know, a down payment assistance above that. You know, you can buy a house with amazingly little money compared to what you might think. And get you into that path of homeownership. But prior to homeownership and tax deductibility and amortization, you know, growth and appreciation, all these things start becoming more, you know, why not? Why wait?
Casey Morris: Exactly.
Sharla Ellis: Beautiful thing. So, the bottom line is, if there is some way to get into a home right now, it's a great opportunity to do it. We'll help you do that.
Chris Gonzalez: Absolutely.
Disclaimers:
Debt-to-income (DTI) ratio is monthly debt/expenses divided by gross monthly income.
VA Loans: *Eligibility subject to program stipulations, qualifying factors, applicable income and debt-to-income (DTI) restrictions, and property limits.
USDA Loans: USDA Guaranteed Rural Housing loans subject to USDA-specific requirements and applicable state income and property limits.
The information in this podcast is distributed for educational purposes only. The information is not guaranteed to be accurate and may not entirely represent the opinions of Fairway Independent Mortgage Corporation.
Copyright©2022 Fairway Independent Mortgage Corporation. NMLS#2289. 4750 S. Biltmore Lane, Madison, WI 53718, 1-866-912-4800. All rights reserved. Fairway is not affiliated with any government agencies. This is not an offer to enter into an agreement. Not all customers will qualify. Information, rates and programs are subject to change without notice. All products are subject to credit and property approval. Other restrictions and limitations may apply. Equal Housing Opportunity.
Fairway is required to disclose the following license information. AZ License #BK-0904162; Licensed by the Department of Financial Protection and Innovation under the California Residential Mortgage Lending Act, License No 41DBO-78367. Licensed by the Department of Financial Protection and Innovation under the California Financing Law, NMLS #2289. Loans made or arranged pursuant to a California Residential Mortgage Lending Act License; Georgia Residential Mortgage Licensee #21158; For licensing information, go to www.nmlsconsumeraccess.org; MA Mortgage Broker and Lender License #MC2289; Licensed Nevada Mortgage Lender; Licensed by the NJ Department of Banking and Insurance; Licensed Mortgage Banker-NYS Department of Financial Services; Rhode Island Licensed Broker & Lender; Fairway Independent Mortgage Corporation NMLS ID #2289 (www.nmlsconsumeraccess.org).
The information in this podcast is distributed for educational purposes only. The information is not guaranteed to be accurate and may not entirely represent the opinions of Fairway Independent Mortgage Corporation.
Copyright©2022 Fairway Independent Mortgage Corporation. NMLS#2289. 4750 S. Biltmore Lane, Madison, WI 53718, 1-866-912-4800. All rights reserved. Fairway is not affiliated with any government agencies. This is not an offer to enter into an agreement. Not all customers will qualify. Information, rates and programs are subject to change without notice. All products are subject to credit and property approval. Other restrictions and limitations may apply. Equal Housing Opportunity.
Fairway is required to disclose the following license information. AZ License #BK-0904162; Licensed by the Department of Financial Protection and Innovation under the California Residential Mortgage Lending Act, License No 41DBO-78367. Licensed by the Department of Financial Protection and Innovation under the California Financing Law, NMLS #2289. Loans made or arranged pursuant to a California Residential Mortgage Lending Act License; Georgia Residential Mortgage Licensee #21158; For licensing information, go to www.nmlsconsumeraccess.org; MA Mortgage Broker and Lender License #MC2289; Licensed Nevada Mortgage Lender; Licensed by the NJ Department of Banking and Insurance; Licensed Mortgage Banker-NYS Department of Financial Services; Rhode Island Licensed Broker & Lender; Fairway Independent Mortgage Corporation NMLS ID #2289 (www.nmlsconsumeraccess.org).
