![]() Since your bonus was declining from one year to the next, underwriters would just take the most recent year or $9,000. You still have a $60,000 base salary but last year, your bonus was $9,000 the year before, it was $15,000. Using the example above, but let’s reverse the numbers. What if your bonus declined from one year to the next? These types of income aren’t guaranteed like your salary is. The way to think about it is they average the variable component of your income. Once you get a raise in your salary, underwriters use the current salary – they don’t average it. Notice that we didn’t take an average of your base income. Your total monthly income in this example would be $6,000. On a monthly basis, this would add $1,000 a month to your usable income. Add $9,000 and $15,000 then divide by two to get $12,000 for a two year average. Your bonus increased from one year to the next, so they can take a two year average. Then they would add in a two year average of your bonus if it’s increasing. ![]() They would take your current base salary of $60,000 and divide it by twelve to get $5,000 a month in base income. How much income would an underwriter use to calculate your DTI? The year before, your bonus was $9,000, and your salary was $55,000. Here’s an example: let’s say you make a base salary of $60,000. This is what most underwriters do: if you get paid a base salary plus bonus or commission, they take your current base and then they add a two year average of your bonus or commission if it’s increasing from one year to the next. What if you get paid a base salary plus bonus or commission? But if you’re self-employed, they use your net income after expenses. If you’re salaried, as in the example above, underwriters use your gross income. Here are some common questions that come up in determining usable income.ĭo underwriters use your gross or net pay to calculate DTI? Now you are ready to calculate your front ratio: divide your proposed housing debt by $6,000 and you have your front ratio.īut figuring out what income to use is a big part of calculating your DTI correctly. DTI is always calculated on a monthly basis. If you have a salary of $72,000 per year, then your “usable income” for purposes of calculating DTI is $6,000 per month. Usable income depends on how you get paid and whether you are salaried or self-employed. Underwriters do not include other costs associated with owning a home, such as heat, water, electric, WiFi, or routine maintenance like lawn care or painting.īesides the items mentioned above, underwriters will also include any payments you have to make on a monthly basis like minimum credit card payment(s), car loan and student loan payment(s), alimony, child support, payments on an IRS tax lien, or a loan against your 401k. Add these items together and you now have your proposed / estimated housing debt. For homeowner’s insurance, you can estimate the monthly cost at somewhere between $40-80. If you’ve seen several homes in the same area, you probably have an idea of how much property taxes are. Once you’ve done that, you need to know (or estimate) the property taxes and insurance on the home you want to buy. You know your loan amount you need an interest rate and term. Here’s how you can calculate your “front” DTI ratio: Calculate the principal and interest payment on your mortgage. How much is your estimated housing debt / expense? How Is Debt-to-Income (DTI) Ratio Calculated? The “back” or “total” debt to income ratio is calculated by adding your proposed housing debt to your other debt, such as payments on car loans, car leases, student loans, or credit card debt (and then divided by your income). There are two ratios – a “front” ratio which consists of your proposed housing debt (principal, interest, taxes, insurance, plus PMI or flood insurance, if applicable) divided by your income. What is DTI?ĭebt to income ratios are just what they sound like – a ratio or comparison of your income to debt. Your loan officers and underwriters will be looking at your DTI to determine if you’re worthy of a mortgage or if you’re better off living in your parents’ basement. In the above form, once you enter your monthly income, recurring (monthly) debt and estimated housing expense details, the debt-to-income (DTI) ratio calculator will calculate your front-end and back-end (total) ratio to help you understand your current financial situation and accurately estimate your probability of getting approved for a mortgage. If your loan officer doesn’t mention DTI, your underwriter will. ![]() If you’re buying a house and getting a mortgage, you will probably hear the words “debt-to-income ratios” or DTI.
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