There's more to getting approved for a mortgage loan than just having good credit scores. Other than having good credit scores, one of the biggest criteria is having a low debt ratio (DTI).

What is a Debt to Income Ratio (DTI) - How is it Calculated?
By Jon Spears

And how does it relate to a mortgage loan?

There's more to getting approved for a mortgage loan than just having good credit scores. Other than having good credit scores, one of the biggest criteria is having a low debt ratio (DTI).

Banks look at 3 main areas when approving a home loan. First, and perhaps the most widely known element of a loan approval, is one's credit score. But they also look at your income and your job history.

For example, a nineteen year old can have an 800 credit score but they can't necessarily buy a home, right? So while credit score are important banks look at income debt ratios (DTIs) and job stability just as much as the credit score.

One's debt ratio is simply the ratio between what someone earns and how much they pay monthly in installment and revolving debt. For example, if a couple makes $4000 but has $2000 going out each month in rent, car payments, credit card payments, this couples debt to income is 50%. $4000/2000= 50%.

Banks prefer home loans with low debt ratios (DTI) because they feel the lower one's DTI-- the easier and more likely the client will make their mortgage payments on time.

What is a revolving debt account? A revolving account is like a credit card. There's no true "end point" to the debt. It's an open-ended line of credit. These debts can be fluctuate; they can be really low one month and really high the next. They revolve.

Installment debts, on the other hand, have a predetermined time-line. Car payments, homes, student loans fall under this debt category. These debts can't be "re-charged" or increased once the terms have been set by the lender. These loan amounts only decrease, on an installment basis.

So when calculating one's debt ratio (DTI or Debt Ratio) banks typically won't allow you to pay down revolving debt in order to qualify. This is because one can easily re-charge the revolving account back up after the new loan is issue.

However, banks will allow you to pay off installment debt since these debts can't be "re-charged." Once they are paid they are paid.

Student loans: Student loans can also impact one's debt ratios (DTI). Some people think if they have high credit scores they'll easily qualify for a home loan. Student loans are often problematic to debt ratios, even if one isn't actively paying on the loan. In fact, putting student loans into deferment can actually give you a worse DTI.

How?

Because when student loans are deferred mortgage banks require the mortgage broker to count the debt against them anyway! But how do mortgage people calculate a"pretend" student loan payment? 3% or 5%.

Some banks require us to count 3% of the student loans towards the borrower's debt ratio, and some banks are much stricter and require a 5% monthly payment. So if one has a $25,000 student loan that's in deferment the loan officer must qualify this borrower with a $750 student monthly loan! This is especially problematic when doing a no-pmi loan or an 80/10 (90% mortgage) or an 80/15 (95% mortgage) home loan.

Anytime one does a "no PMI" loan the debt ratio is a huge issue as second lien companies are often more strict than the first lien mortgage company. Second lien companies typically prefer DTIs in the 40-45% range. Of course, if one's debt ratio is higher than 45% they'll probably just have to get a single, first lien which will include PMI.

Now you can see there's more to getting approved for a mortgage loan than just having good credit scores. Other than having good credit scores, one of the biggest criteria is having a low debt ratio (DTI).

Jon Spears is a licensed Texas mortgage broker in Austin, Tx. In addition to purchase loans and home equity loans, he helps people buy and refinance investment properties to help bolster their retirement goals.

He specializes in Texas Mortgage, refinance and home equity loans at low rates.

He started his mortgage company, mylendingplace.com, in 2005 and has closed millions of dollars in mortgages and refinances. His office is 512-996-8194

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