Arizona  FHA Streamline Refinance.info 

DEFINITION : DEBT-TO-INCOME (DTI)
 

Debt-to-Income (DTI) is a term used in the lending industry which describes a person's monthly debt load as compared to their monthly gross income.
 

Mortgage lenders use Debt-to-Income to determine whether a mortgage applicant can afford to maintain payments a given property. DTI is used for all purchase mortgages and for most refinance transactions.
 

It can be used to answer the question "How Much Home Can I Afford?"
 

Debt-to-Income measures a mortgage payment's economic burden on a homeowner.
 

Most mortgage guidelines enforce a maximum Debt-to-Income limit.
 

HOW TO CALCULATE YOUR INCOME FOR A MORTGAGE APPROVAL
 

Mortgage lenders calculate income a little bit differently from how you might have thought. You receive credit for more than just your "take-home" pay. Lenders perform calcultions for bonus income; give credit for certain itemized tax deductions; and apply specific guidelines to part-time work.
 

The easiest income calculations are applied to W-2 employees who receive no bonus and make no itemized deductions.

For W-2 employees, if you're paid twice monthly, your lender will take your last two pay stubs, add your gross income before taxes, and use this sum as your monthly income. If you receive bonus income, your lender will look for a two year history and will average your annual bonus as a monthly figure to add to your mortgage application.
 

For self-employed borrowers who own more than 25% of a business, calculating income is a bit more complicated.

To calculate income for a self-employed borrower, mortgage lenders will typically add the adjusted gross income as shown on the two most recent years' federal tax returns, then add certain claimed depreciation to that bottom-line figure. Next, the sum will be divided by 24 months to find your monthly household income.
 

Income which is not shown on tax returns or not yet claimed cannot be used for mortgage qualification purposes. 

In addition, all mortgage applicants are eligible to use any regular, ongoing disbursements for purposes of padding their mortgage income. Pension disbursements and annuities may be claimed so long as they will continue for at least another 36 months, as can social security and disability payments from the federal government. Non-taxable income may be used at 125% of its monthly value.  

 

HOW TO CALCULATE YOUR DEBT FOR A MORTGAGE APPROVAL
 

For mortgage applicants, calculating debt is less straight-forward than calculating income. Not all debt which is listed on a credit report must be used, and some debt which is not listed on a credit report should be used.
 

Lenders split debts into front-end and back-end debt. Front-end debts include payments to your credit card companies, car loans and your student loans. Back-end debts are debts related to housing.
 

To calculate your debts as a lender does, add up the following items:

• Your monthly minimum credit card payments

• Your monthly car payments

• Your monthly personal loan payments

• Your monthly student loan payments

• Your monthly child support and/or alimony payments

• Any other monthly payment which is not listed on your credit report
   

There are several exceptions to this list. For example, if you have a car loan or other payment with 10 or fewer payments remaining, the payment do not have to be included in your debt-to-income calculation. Student loan for which payments are deferred at least 12 months into the future can omitted as well.
 

The total of these items is your monthly front-end debt.

To calculate your back-end debt, add your mortgage payment to whatever other monthly payments you make in relation to housing. This can include your real estate tax bill, your homeowners insurance bill, and monthly assessments to an home owners association among other items in your PITI. (Principal, Interest, Taxes, and Insurance)

Your front-end debt and back-end debt combined make up your total monthly debt.

 
 

CALCULATING YOUR DEBT-TO-INCOME RATIO
 

After you've determined your monthly income and your monthly debt, to find your Debt-to-Income ratio divide your monthly debts into your monthly income.

Here are a few examples of the Debt-to-Income formula.
 

Calculating a 25% DTI

• Monthly Social Security Income (taken at 125%) : $3,000

• Monthly recurring debts : $250

• Monthly housing payment : $500
   

Calculating a 40% DTI

• Monthly W-2 income : $5,000

• Monthly recurring debts : $750

• Monthly housing payment : $1,250.00
   

Calculating a 45% DTI

• Monthly self-employment income : $5,000

• Monthly recurring debts : $1,000

• Monthly housing payment : $1,250
   

Most mortgage loan programs require homeowners to have a Debt-to-Income of 40% or less, but loan approvals are possible with DTIs of 45 percent or higher. In general, mortgage applicants with elevated DTI must show strength on some other aspect of their application.

This can include making a large downpayment; showing an exceptionally-high credit score; or having large amounts of reserves in the bank accounts and investments.
 

Also, note that once a loan is approved and funded, lenders not longer track Debt-to-Income ratio. It's a metric used strictly for loan approval purposes. However, as a homeowner, you should be mindful of your income versus your debts. When debts increase relative to income, long-term saving can be affected.

 

 

LOANS WHICH DON'T USE DTI FOR APPROVAL
 

Mortgage lenders use Debt-to-Income (DTI) to determine whether homes are "affordable" for a U.S. home buyer. They verify income and debts as part of the process. However, there are several high-profile mortgage programs which ignore the DTI calculation.

Among these programs is the popular suite of "streamline" refinances available via the FHA, the VA,  and Conventional Loans from Fannie Mae and Freddie Mac.

The FHA Streamline Interest Rate Reduction Refinance

The FHA offers a refinance program called the FHA Streamline Refinance which specifically ignores the Debt-to-Income requirements present for an FHA purchase loan.

The official FHA mortgage guidelines for the agency's streamline refinance program waive income verification and credit scoring as part of the mortgage approval process. Instead, the FHA looks to see that the homeowner has been making his existing mortgage payments on time and without issue.

If the homeowner can show a perfect payment history dating back 3 months, the FHA assumes that the homeowner is earning enough to "pay the bills".  Debt-to-Income is not considered as part of the FHA Streamline Refinance.
 

The VA Interest Rate Reduction Refinance Loan (IRRRL)
 

The VA Interest Rate Reduction Refinance Loan (IRRRL) is another refinance program which waives traditional home loan Debt-to-Income requirements. Similar to the FHA Streamline Refinance, IRRRL guidelines require lenders to verify a strong mortgage payment history in lieu of collecting W-2s and pay stubs.

The "VA Streamline Refinance" is available to military borrowers who can show that there's a benefit to the refinance either in the form of a lower monthly payment; or a change from an ARM to a fixed-rate loan.
 

The Home Affordable Refinance Program (HARP)
 

The Home Affordable Refinance Program (HARP) is another refinance program which omits the Debt-to-Income calculation from its approval process. As part of HARP 2.0, Fannie Mae and Freddie Mac allow U.S. homeowners to substitute "money in the bank" for actual income verification. 

According to official HARP 2.0 guidelines, lenders are not required to collect tax returns or pay stubs for homeowners who can show at least 12 months of PITI in reserve, as well as a perfect mortgage payment history of the last 6 months, and eleven of the last 12 months.

Note that lenders have the option to verify income via HARP and some choose to do it.