A lender will consider many different factors when approving your mortgage application. They will look at items like your credit score, down payment, and income to determine whether you should be issued a loan.
Another factor they will consider is your debt load. To decide whether you should get the loan, they will take into account how much debt payments you have every month. It’s far from the only thing they consider, but it’s one of the most important.
It’s Not How Much Debt, It’s the Ratio
When looking at your debt, it’s important to understand that lenders don’t just consider the total amount of money you owe, but how those payments compare to your income. In the end, they will use what’s known as your “debt-to-income” ratio, or “DTI”.
Say you earn $8,000 a month, and your total debt payments are equal to $2,000 a month. In this case, your DTI would be 25%. ($2,000 (debt) is 25% of $8,000 (income)). This is important, as someone with a high income could have $2,000 in debt, while someone who earns $4,000 a month would have trouble with this amount, as it would be half their income.
Front-End vs. Back-End Ratios
Although it’s less important, you will often hear the terms “front-end” and “back-end” ratio tossed around by people in the lending industry. Basically the front-end ratio is the comparison of only your mortgage costs to your income, while the back-end is your total debt load, including mortgage, car payments, student loans, and more.
For our purposes, we are discussing the back-end DTI ratio.
Debt-to-Income Ratio: When is it Too Much to Secure a Home Loan?
Note: DTI requirements vary by loan, lender, and borrower. The numbers can change over time, and certain situations may allow for high DTI ratios. These numbers are provided for information only and may not reflect current requirements.
Conventional Loan: 45%
A conventional loan is simply a loan that conforms to the standards set by Fannie Mae, one of the largest institutions (technically it’s a private company backed by the federal government) in the lending industry. These loans are available to many people, and they commonly have a DTI requirement of 45%. If your debt-to-income ratio is higher than 45%, you will have a hard time getting approved through a conventional loan.
FHA Loan: 43%
The Federal Housing Administration does not actually loan money for home purchases. (No government organization actually supplies home loans.) Instead, they provide insurance to lenders who offer loans that meet a specific set of standards. This enhances borrowing potential for many buyers, and gives lenders greater financial stability when writing loans. For most borrowers, the requirement is 43%, which means the requirements are a little more strict that conventional loans. However, if you have a higher credit score and strong financial reserves, you may be able to secure financing with a DTI as high as 47%. There is also a condition that allows you to secure an FHA loan with a DTI as high as 50%, but you will need to meet a variety of requirements, such as documented reserves and a minimal increase in overall payments.
VA Loan: 41%
VA loans are important options for many veterans. They are one of the few loan products that offer 0%-down financing, meaning qualifying individuals can secure a loan with no downpayment, although closing costs and other fees may still be required. (They can sometimes be wrapped into the loan.) For these loans, you will need a DTI of 41% or lower, which is actually one of the areas where this product has higher standards than many others. (In general, they are more lenient if you are a qualifying veteran, just not for DTI.)
Lenders, however, are not always chained to this requirement. Borrowers can find different requirements with different lenders, so don’t be discouraged if your DTI is higher than 41%, as there may be VA-loan options available.
USDA Loans: 41%
The USDA provides support for loans in certain rural and suburban areas, giving borrowers the chance to purchase homes in areas that have been deemed in need of support. This is the other main loan product that allows for zero-down financing, but you need to meet specific standards to qualify. For DTI, this means you need at a percentage that is 41% or lower.
Jumbo Loan: As Low as 35% in Some Cases
A jumbo loan is by definition a higher total amount, so high that it is not supported or insured by any government institution. In this case, the requirements vary largely depending on the lender, as there is virtually no influence from government organizations. (Beyond typical regulations, or course.) The risk for these loans is higher, so the DTI requirements will likely be around 35% or lower. However, you can find jumbo loans with flexible requirements, especially if you have a strong credit score, large reserves, and a big downpayment.
Number Too High? There are Options
No matter what, if you find your DTI is too high, don’t stop looking. You may find that there are loan options available, even if you have a high debt-to-income ratio. Always shop around and speak with multiple lenders, especially lenders with a wide variety of resources and decades of experience, as they are more likely to find a loan that fits you needs.
If You Have 50% or Higher, It May Be Best to Wait
Although we believe everyone should someday own their home, we would encourage you to reduce your DTI to a manageable level before buying. Specifically, if your DTI is well above 50%, it may be wise to wait.
Find a Loan that Fits Your Current DTI
If you are looking for a top-quality loan, contact the staff at San Diego Purchase Loans. No matter what your current DTI, we’ll do whatever we can to increase your chances of approval.
From jumbo loans to conventional loans, you’ll find the right resources to make an excellent home purchase.
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