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Debt-To-Income Ratios When analyzing your budget, underwriters use two different debt ratios to determine if you can afford his obligations. These two debt ratios are your housing expense-to-income- ratio and your total debt to income ratio. The housing expense-to-income ratio is simply your monthly housing expense (including principal and interest, property taxes, homeowners association fees -- if any -- & hazard insurance) divided by your monthly income. Lenders often use the term "P.I.T.I." It refers to (P)rincipal, (I)nterest, (T)axes and (I)nsurance. While P.I.T.I. is not exactly the same as monthly Housing Expense because it does not include homeowner's association dues, the two terms are often used interchangeably. Underwriters generally require that your housing expense ratio not exceed 28% for a conventional mortgage. In other words, your housing expense should not exceed 28% of your income. The second ratio that underwriters use to determine if you can afford your obligations is the total debt-to-income ratio. Your total debt is derived by adding your monthly housing expenses plus your total monthly other debt, such as installment loans, revolving accounts, personal loans, etc. Monthly debt does not include utilities, food, or other personal expenses. Generally, underwriters require that your total debt-to-income ratio not exceed 36%. These guidelines need to be taken with a grain of salt, however. With the increasing popularity of automated underwriting, many times an application with housing expense or total debt ratios far above these recommendations can be approved if there are compensating strengths such as credit history or employment history. These are guidelines, not rules. |
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