What Is the Total Debt-to-Income Ratio and Why Is It Important In Getting A Credit Union Mortgage?
Becoming a Home Owner
So, you have decided to take the plunge and buy a house. No more renting for you. You are ready to not have anyone living above or under you, to have more privacy, and to have you monthly payment build equity instead of just going to your landlord. You have found a realtor, and let them know what you are looking for. You understand that you need to pick a house that will be within your budget, but you also want one with a nice yard, good schools, and with some room for you to grow. If you are the hands on type, you might look for one that needs some TLC, but gives you more space or is in a better location. If the thought of a hammer and saw puts you in a cold sweat, find the best deal on a home that is in good shape right now.
What Is The Debt To Income Ratio?
You know how much you have saved up for a down payment, and know how hard it was to accumulate. However, as you narrow down your list to those final two or three houses, you realize that you need to know exactly how much the credit union is willing to loan you in a mortgage. As you begin the credit union mortgage application process, you begin to hear people talk about your ratios, and even ask you what your ratios are. If you are new to mortgages, you are likely mystified by what these ratios are and why they are important. The main ratio that is being referred to is your Total Debt to Income Ratio.
The Total Debt to Income ratio is a way for the credit union to feel comfortable that you will be able to pay your mortgage each month. The credit union first adds up your gross income (before any taxes or deductions). Then they subtract anything that would show up on your credit report – such as your credit card payments, car loan payments, student loan payments, and any child support or maintenance payments you make, as well as the expected total credit union mortgage payment. Remember that this credit union mortgage payment will be made up of four items Principle (the actual loan amount), Interest (how much you are paying for the loan), Taxes (usually escrowed, or held, by the credit union and paid yearly), and Insurance (required by the credit union and good idea anyway.) Together these four items are often referred to as PITI. The credit union then divides this total debt payment amount by your total income amount. This is called your Total Debt to Income Ratio – and they usually want it to be 45% or less. So, if you earn $5000 a month and spend $2250 on the above items, then your Total Debt-to-Income ratio would be 45% ($2250/$5000 = 45%). In addition, some credit unions also like to see your PITI/Income ratio be under 30%, which in the example above would mean $1500 or less per month ($1500/$5000 = 30%).
Hopefully, you will find that you are well within these limits. If not, you may be tempted to pay down some of the debts immediately. However, don’t forget that the credit union will require you to keep three months or more of expenses in savings as an emergency fund to help protect you against the unexpected expenses that come up in daily life. Take time to talk with your credit union mortgage officer, and they will help you figure out the best way to help you qualify.