i got this definition from an article

Debt Ratio (DR, D:I).Also known as debt to income. The ratio of the total of minimum monthly debt payments to gross monthly income. If minimum monthly payments on a credit card, auto lease, and mortgage (PITI) were $30, $220 and $750 respectively and the gross monthly income was $3000, the debt ratio would be 33.33% ($1000 / $3000). Only debt obligations that will be in place after the loan has funded are considered. Payments for food, utilities, entertainment, medical bills, etc. are not included in the calculation. Contractual obligations for rent (e.g., a lease) would be included in the calculation. The housing ratio in this example would be 25.0% ($750 / $3000).

The preferred candidate for conventional loans typically would have debt ratios of 28% for housing and 36% for the total with the maximum ratios allowed being around 30% / 40% (housing / total).

is it bad if the housing is over 30%?
is it bad if the total is over 40%?

there are also sub-prime lenders that will allow for the total DTI to go up to 55%. This allows for borrowers who have a spouse or second income that cant be used on the loan for credit or verification reasons to be able to close. The sub-prime DTI does not seperate the housing expense from consumer debts. The DTI is figured off of Gross Income before any deductions are taken out of the pay check. Also remember items like child support, and 401K loans will be counted in the monthly debt.

For A and Alt-A borrowers, there are "no ratio" loans available where the lender will ignore the DTI. Of course, the borrower will usually get a slightly higher rate because of it but it beats having to go sub-prime because of it, especially if the borrower has a good credit score.

so what if the housing DTI is 40% does this mean a higher interest rate? Y/N

what if housing DTI is 20% does this mean higher interest rate? Y/N

i still dont get which side is good or bad?
its like saying from a scale of 1-10 with 1 being bad and 10 being good.

alvin,
it's not a question of being bad, it's a question of...
1. will the lender let you go over the standard ratios?

2. if so, are you comfortable with the payments? keep in mind the higher the ratios, the more cash poor you will be.

important note, fnma has de-emphasized the housing ratio, and focuses mostly on the total ratio. with an A paper lender, if your credit is excellent, you can often go up to 65% back-end (total) dti. if you can keep the dti in the low to mid 40s, you're doing pretty good. if your credit is not so good, you'll need to go sub-prime...and depending on your credit you may be able to go up to 50 or 55%.

also, point of clarification....401k payments are not counted in your dti ratio.

Sammy

There is no set DTI for conforming loans. It is whatever the decision engine will take. The better the credit profile the better the outcome. The more financial reserves someone has the better the odds it will take a higher DTI. The one thing you have to remember is that with conforming there is very few set rules, It all depends on the borrower.

Good point Adel. Credit AND assets (reserves) are the key, and there is no set in stone max DTI.

I should have clarified saying on a conforming loan, you won't get an "Approve/Eligible" (top level approval) above 65% DTI.

Sammy

Adel and Sammy are correct about the reserves. I have a borrower going FHA. He makes additional income that I can prove so his back end DTI was close to 60%. He got an approve eligeble from Fannie Maes desk top underwriter because we could prove he had a substantial amount of reserves.

20% may give you a credit towards a better rate.

40% may as well but with conforming or alt-a the 20% would possibly get a better rate. Normally you see a conforming alt-a credit at around <35% DTI.

Sub-Prime will sometimes add to the rate for >40%, 45%, 50%. In some cases adjust at each DTI or a mix of 2 of them ie <45% par, 45-50% add, >%0% add more.

Does that clear it up Alvin?

Also remember that all pricing for all credit grades from A+ to F- is based on risk. So there are ocassions when your borrower may have a 720 score for example, but a high DTI around 50% this will determine who is willing to do the loan and at what rate and LTV. Here is an exapmle of what I consider to be a perfect low risk buyer


760 score

Full doc meaning your can provide 2+ years of W-2's and check stubbs with consistent income

Same job for 2+ years and/or same line of work for 2+ years.

20% seasoned down payment meaning you can go back 60+ days on Bank statments and prove that they have seaved this money and it is not an impulse down payment or gift etc.

No Bankruptcy/ Foreclosures/ collections/ judgments on credit bureau

If they are a 1st time home buyer they can provide 12 copies of thier last 12 months rent checks if they rent from an individual. Or if they rent from an institution they can get a properly executed verification of rent form filled out by that company. If they are selling current home proof on Credit file showing all payments were made on time.

The property is a suburban single family residence in a neighborhood where the property values are strong.

A debt to income ratio that is between less than 32% for housing expenses and no more than 45% for all debts combined.

In my opinion this is an example of a low risk borrower who will get the best available rates and programs.

Any thing listed above that has to change can and most likley will affect the borrowers interest rates. Such as lower scores, stated income, rural property, multi unit property, non-owner occupied, credit scores, Higher Loan to value, Bankruptcy and foreclosures, high DTI all of these items will add to the interest rate due to risk of transaction.

I am not sure if this is helpful, but I hope it gives an idea

also reserves have a major impact on pricing and terms. If the borrower can show they have 6 months of liquid cash available it is a positive factor.