How Does DTI Affect Loan Amounts?
Posted on: June 26, 2018
There are a lot of different factors that go into determining the specifics of a mortgage. Aside from the downpayment and their credit score, home buyers will want to be aware of their DTI.
The lesser known of these factors is DTI. While DTI isn’t going to play a role in determining how large your monthly payments are, it will determine whether or not you’re eligible for a mortgage.
Depending on your DTI, the size of the loan a lender is willing to offer could change.
What is DTI?
The Debt-to-income ratio, or DTI, shows how much debt you have in comparison to your income.
DTI is split into two parts: the front-end ratio and the back-end ratio. The front-end ratio includes everything that would go toward your new home, including homeowners insurance, taxes and your mortgage payments. The back-end is every other debt payment you might have (credit cards, car payments, student loans, etc.) combined with your front-end ratio.
As an example, let’s say that a veteran home buyer wants to purchase a home and figures out that their monthly housing expenses will equal $1,000. This home buyer also brings home $4,500 a month in income. To calculate the front-end, we divide the monthly housing expenses by the monthly income, giving us a front-end DTI of 22 percent.
For the back-end, we add that 22 percent with the total percentage of income spent on other debts. With the same income, monthly payments toward car, credit cards and student loans of $450 would equal 10 percent, giving us a back-end DTI of 32 percent.
When DTI is represented, the front and back ratios are put together. In this example, we would say the veteran home buyer’s DTI is 22/32.
Maximum DTI for VA loans
Many home buyers don’t think about DTI, but it’s an important part of becoming eligible to buy a home. If DTI is too high, lenders won’t be able to approve a mortgage. When considering a home buyer’s DTI, they use the back-end ratio.
Loan programs generally have a maximum allowable DTI, and it’s difficult for a home buyer to get approved with a ratio of over 50.
Generally speaking, VA eligible home buyers will need to have a DTI of 41 or lower to get approved. While it’s possible to get approved with a higher DTI, it’s best to play it safe and find a way to keep your ratio below 41 percent – and even lower, if possible. A DTI of 36 percent or lower is considered safe by almost all lenders.
DTI and loan amounts
While your back-end ratio determines your loan eligibility, your front-end ratio will determine how much home you can afford. The front-end ratio is a direct correlation between your home payments and your income, and lenders will use this to see if you can afford a larger loan.
Most lenders will want to see a front-end ratio of 28 percent or lower before approving a mortgage. For some home buyers, this could mean that the acceptable amount is lower than the limits offered by the VA. But the VA only guarantees the mortgages, and lenders will use their own set of standards to determine whether a loan is acceptable or not.
On top of that, your DTI could have a direct impact on the size of the mortgage rate you get. Lower mortgage rates mean lower monthly payments, something that any home buyer would want.
Higher loan limits for VA loans
At the beginning of 2018, the loan limits for VA loans was increased. This makes it easier for VA home buyers to afford homes on a hot housing market.
New loan limits for VA loan range from $484,350 to $484,350, depending on where the home is being purchased. More expensive states will trend toward the higher end of the loan limits.
If home buyers have a low enough DTI, they can be eligible to get the full loan limit amount while avoiding paying any type of downpayment.