Why can’t I qualify for a loan?  I get this question from borrowers a lot these days, with the tighter lending standards and the demise of no doc loans.  In addition to credit factors and loan to value issues, one of the major issues today is the DTI ratio.  I believe it is important for borrowers to have as much information as possible about their transaction, and to understand some of the issues they may face in obtaining a loan.  Here is a quick rundown on DTI ratios, how to calculate them, and some ideas to reduce yours.

DTI stands for debt to income.  The debt to income ratio is the ratio of your income to your debt.  Typically, this ratio needs to be at 45% or less, although there are a number of circumstances that will allow for a higher ratio, sometimes as high as 60%.  The calculation is not hard to figure. 

Take your annual income, this is pre-tax, not take home, and divide it by 12.  This is your monthly income.  Next, take all of your monthly debts, car payment, property taxes, insurance and the minimum payment due on your credit cards (you do not need  to include utilities, etc.) and add them up.  Divide your total monthly debts by your total monthly income and you have your debt to income ratio.  So if you make $72,000 a year on a salary ($6,000/month), and have $3,000 in monthly debt, your debt to income ratio is 50%.

When calculating your DTI, you can use your existing mortgage payment to get a rough estimate.  When we calculate it for home loan purposes, we are going to use the new, proposed loan payment.  If you want to estimate what it would be, you can use our online mortgage calculators to get a good idea. 

If your DTI is high, chances are you will have a tougher time qualifying for a loan these days.  To reduce your debt to income ratio, you typically either need to reduce your debt, or increase your income.  If you have a car loan, or multiple car loans, refinancing those loans can reduce your monthly debt.  If you are a member of a credit union, often times you can get pretty good terms.  If you have liquid assets, paying down your credit card balances will also reduce your debt. 

These days, another option for reducing your DTI is getting your property taxes reduced.  This can be a big one, with property values falling, you may be able to save yourself a decent amount of money each month by doing this.  You typically need to contact your county assessor’s office, and they will let you know what paperwork you need to submit.  Talk with a local realtor, see if they will pull comps or put together a market analysis for you to substantiate your homes current value.  If you are in the area, you can contact my wife to put together a market analysis for Contra Costa real estate.

Hopefully this has been informative, please feel free to contact me with any questions on this subject, or any other related to real estate finance.