Refinance Loans: What Counts When Calculating Debt-To-Income Ratio?

Last Updated 1/12/2015

What income and expenses count when calculating DTI to get approved for refinance loans?

Know What Counts to Calculate Debt to Income Ratio

DTI (debt to income) ratios are used for ensuing borrowers can afford the mortgage loans they are applying for. Allowable ratios change over time, and differ between refinance loan programs. On the surface they appear very easy to calculate. Still, there are some quirks which can really throw some homeowners off. Let’s look at some of the expenses which borrowers may not expect to count against them, as well as some of the twists which can reduce the amount of income they can count.

When it comes to expenses mortgage underwriters generally focus on the debts and payments which show up on consumers’ credit reports. This will include any current mortgage payments, credit cards, auto loans, etc.

However, there are two big hitters which can completely throw DTI ratios off. The first is student loans. Most home buyers and homeowners don’t expect student loans with deferred payments to count against them. Yet, at some point those payments will kick in and lenders want to ensure borrowers will still be able to afford their home loans at that point. The same applies to no payment, no interest store credit cards and car loans.

Fortunately, in the reverse, if borrowers can show that certain debts will be paid off within 10 months or less, the related payments may not count against them. Some may consider paying down car and other installment loans so that they do not count against them to calculate debt to income ratio.

There are two types of DTI. ‘Front end’ or housing ratios calculate housing expenses as a percentage of monthly income. While back end ratios factor total monthly financial obligations as a percentage of monthly income. Remember that these figures will include property taxes, homeowners insurance, and any relevant HOA or condo dues too.

Lastly on the expense side; anticipate underwriters to factor in higher payments when applying for an adjustable rate mortgage (ARM), interest only loans, and other types of graduated payment mortgages. They want to know you can afford to keep on time, even in the worst case scenario.

On some loan programs borrowers may be able to use secondary cash income or other household income to help them qualify. However, in general self-employed borrowers need to anticipate only qualifying with a portion of their real incomes. Underwriters traditionally use the Adjusted Gross Income (AGI) from tax returns for this figure. On some programs bank deposits and investment property income may be added, but this will also generally be discounted as well.

In summary; know your DTI and how you can improve it before formally applying for a refinance loan and you’ll enjoy the results a lot better.