Debt-to-Income Ratio

[wvf3]

Does anyone understand how Debt-to-Income ratio is factored in the credit score? I am one year out of Chapter 7 and have not taken on any additional debt other than a $300 limit credit card which was suggested by a mortgage lender to help rebuild my credit. However I still have a very *large* student loan debt which was not discharged (the total I owe equals about twice my annual income). However I am not paying on it at the moment because it is in deferment status while I am taking some job-related college courses. My question revolves around what the affect of this student loan is on my credit score and how will it affect my future in terms of buying a car and home. I plan to continue taking classes (part-time) until next year. At that point the new Student Loan Fair Payments bill goes into affect and my payment will be approximately 8 percent of my gross income (the current Income Contingent payment for me is about 15 percent of gross). Does anyone have any thoughts or suggestions on how this may affect my credit and ability to buy a home/car, etc.? Thanks!

[rrockinggramma]

Student Loans that are in deferment and will be delayed for more than 12 months are not figured into DTI for FHA. I can't speak for conventional financing since I don't qualify for it. Once I am discharged, my student loans will go back into repayment and then will count in my DTI.

[floorman]

DTI is not factored into your credit score. The CRA's don't know what your income is. They do factor utilization which is the percentage of available credit (unused) to total credit.

[wvf3]

Rrockinggramma and Floorman, thank you very much for your insight. I feel better about the chance of getting an FHA loan so we can buy a house next year. Now I need to work on building up my down payment.

[JollyGG]

Debt to Income ratio is not factored into your FICO score. However, FICO is not the only factor lenders consider when deciding to loan money or not. Lenders do consider your debt to income ratio. You would have to ask you specific lender what their guidlines are for this. Or perhaps one of the morgage brokers who visit our site can tell you what the FHA guidelines are.

[NotFun]

The Debt to Income ratio for FHA or a conventional, should really be no greater then 38%. Now I have gotten loans through with a 55% D/I, but thats with credit scores in the high 700's. The best thing you can do to prepare for buying a home is, build cash in your savings account, don't change jobs, get and credit card debts below 30% of the limit, and get a copy of your credit report from all three bureaus. Once you get a copy of your credit report, go through it and make sure everything is correct. If it is not, contact the bureau and have them make the corrections.

[wvf3]

The Debt to Income ratio for FHA or a conventional, should really be no greater then 38%. Now I have gotten loans through with a 55% D/I, but thats with credit scores in the high 700's. The best thing you can do to prepare for buying a home is, build cash in your savings account, don't change jobs, get and credit card debts below 30% of the limit, and get a copy of your credit report from all three bureaus. Once you get a copy of your credit report, go through it and make sure everything is correct. If it is not, contact the bureau and have them make the corrections.

Thanks for the info. I have a follow up question. For example say you owe $100,000 in Student Loans and you are earning $50,000 per year. Does that mean your Debt-to-Income ratio is 200 percent? I don't quite understand how student loans would be factored into the equation. In 2009 when I go into repayment, I will make payments under the new Student Loan Fair Payment Act. What that means is that my payment will be based on a percentage of my income. My payment will be about 8 percent of my gross income. Because I work at non profit institution, I will be eligible for cancellation of the remaining balance after 10 years.

The question: Is Debt-to-Income ratio based on the TOTAL amount owed or is it based on the amount that you pay MONTHLY. If it's the latter then I can probably afford to buy a house next year.

Thanks!

[rrockinggramma]

In FHA, it is the monthly payment that is factored in to DTI.

[Boscoe]

wvf3 - Look at it this way.........

The bank needs to determine whether or not you will pay them back and assess the risk that you will not. If your debt to income is too high, how will you be able to do that?

To make this determination, the bank will have you prove your monthly income, then ask you what your monthly expenses are, like car payment, student loan monthly payment, credit card monthly payments, etc. They generally don't approve you if you go over their acceptable %. This is because they know you need the rest for normal expenses like food, clothing, utilities, gas, etc., and more if you have kids.

So, it probably would be a good idea for you to write all this down and see how much you have leftover for your mtg payment. But remember, you have to pay for homeowners insurance and real estate taxes, so factor that in. And if in a condo, the condo fees. And don't forget that utilities and housing repairs/upkeep are usually more (and can be alot more) than in an apartment.

And you will want to leave some money leftover each month for a safety net and some for entertainment, vacations, etc.

Believe me, you don't want to get into a housing payment you cannot afford! Good luck.

[NotFun]

Thanks for the info. I have a follow up question. For example say you owe $100,000 in Student Loans and you are earning $50,000 per year. Does that mean your Debt-to-Income ratio is 200 percent? I don't quite understand how student loans would be factored into the equation. In 2009 when I go into repayment, I will make payments under the new Student Loan Fair Payment Act. What that means is that my payment will be based on a percentage of my income. My payment will be about 8 percent of my gross income. Because I work at non profit institution, I will be eligible for cancellation of the remaining balance after 10 years.

The question: Is Debt-to-Income ratio based on the TOTAL amount owed or is it based on the amount that you pay MONTHLY. If it's the latter then I can probably afford to buy a house next year.

Thanks!

No your looking at it as the total balance and what your income is. Thats not the way to figure it out.

What you do is figure out what your payment will be on your loans, and divide that into your income. thats how you calculate your D/I.

Say your total monthly bills are $500 a month, and your income is $1,000 a month.

take $500 and divide that into the $1,000, which gives you a D/I of 50%.

[wvf3]

Thanks!

Thank you all for the great replies. This site has been invaluable to me.

WVF

[wvf3]

Say your total monthly bills are $500 a month, and your income is $1,000 a month. Take $500 and divide that into the $1,000, which gives you a D/I of 50%.

Yes, now it is clear. Of course since my student loan payment is "Income Contingent" (i.e., it is not a fixed monthly payment but fixed percentage of income) then I know automatically how much it counts against my Debt-to-Income ratio: At this point it's 8 percent of AGI. Since I don't I have any other significant debts (no cars , nothing other than a $250 balance on credit card), then I assume that I start out at 8 percent D/I and then I guess I figure I can work with another 25-30 percent for mortgage payment.

At least that's how I understand the explanation. Thanks!

[krielly]

Just a bit of advice. Don't necessarily put yourself at the max debt to income ratio with this mortgage. You don't have a car payment NOW, but I am assuming you will have one sometime during the next 30 years or so of your mortgage

Make sure you allow yourself some breathing room.

good luck!

[wvf3]

Just a bit of advice. Don't necessarily put yourself at the max debt to income ratio with this mortgage. You don't have a car payment NOW, but I am assuming you will have one sometime during the next 30 years or so of your mortgage

Make sure you allow yourself some breathing room.

good luck!

Thanks for your reply. What is a reasonable D/I for a potential home buyer to consider?

[krielly]

I would simply factor in a reasonable payment amount into your total budget. As though you currently had a car payment, and then see what it brings your total d/i ratio to. This will allow you room to afford a car payment down the road when needed. Try not to exceed a total of that 30 something percent previously mentioned. Think 38% was mentioned as the max for an FHA loan, which is a reasonable guide, I think.