When everyone firsts thinks about applying for a mortgage loan the first concern is their credit scores. And, where your credit scores are really important and must fall within a certain range, your debt holds an equally important status when it comes to actually getting approval for that home loan.
Often a borrower will look at their own income and their own payments and think oh I can make a house payment of ‘x’ amount. However, mortgage lenders have their own view of your debt and what you can afford to make as a future house payment.
Even though debt-to-income ratios vary somewhat a typical example would be that only 39% of your income can be your future house payment and only 43% of your income can be total debt. For example, if your monthly income is $2000, then your new house payment, including taxes, insurance and PMI, can be no more than $780 and your total debt can be no more than $860. Now, this debt does not include the cost of such things as your utilities, groceries and gas for the car.
Typically it is the monthly payments for all the items showing on your credit report. If you have a credit card that shows a minimum payment of $30 on your credit report, but you typically pay $50 each month toward that outstanding balance, only $30 is counted by the mortgage lender in calculating your total monthly debt.
Some items on your credit report that might cause a variance are student loans, child support and/or collections.
If you have student loans that are not deferred for three years then a payment will be calculated for you and that will be included in your debt, even though you are not currently making payments toward your student loans.
If you are making court ordered child support payments then these will also be included in your debt.
If you have outstanding collections, a payment amount may be included as part of your debt even though you are not making any payments toward these collections at the time.
What if some of the debt in your name is being paid by someone else? For example, your parents may be paying your student loans for you, but these loans are in your name and showing as debt on your credit report.
Some lenders will allow this payment to be removed from your debt calculation if your parents can show copies of cancelled checks where they have been making these payments, will sign a letter stating that they plan to continue paying this debt and can show income sufficient to continue making these payments.
Not all lenders will allow this but if you are having a DTI problem it is certainly worth pointing out to the lender to see what they will say. It is also worth trying another lender if you are turned down because of your DTI and this is your situation.
Another example may be that ex-spouse is making a car payment on an automobile loan that is still in your name. The same documentation proof would be required.