When applying for a loan you will often hear your mortgage adviser talk about your debt-to-income ratio. This is simply a comparison of your monthly obligations to your total monthly income – expressed as a percentage. For instance if you have monthly obligations totaling $3,000 and your monthly income is $8,000, your debt-to-income ratio is 37.5% ($3,000/$8,000)
The reason this percentage is important is because each lender has guidelines which establish a limit on the ratio of your debt-to-income. These ratios may vary by lender and also by mortgage product. Also, exceptions may be made for debt-to-income ratios that are beyond the established limit, if there are mitigating factors, such as excellent credit history.
Monthly Income and Monthly Obligations
How do you determine what to include in your monthly income and monthly obligations?
At Marimark Mortgage we will calculate your debt-to-income ratio for you and help you to determine what amount of loan you may qualify for based on that information, as well as your employment and credit history.
In general, your monthly obligations will be determined by obtaining your credit report. Each of your monthly obligations, such as mortgages, car loans, credit card debts, student loans, etc. will be reported on your credit report and will include the balance due and monthly payment. We will review these items with you to make sure that the items reported are accurate and we will also inquire if you have other obligations that may not be reported here, such as recent additions to debt, alimony and child support payments, private debt obligations, etc.
Your monthly income will include all of your sources of income, such as base salary, commissions, interest and dividend income, income from rental properties etc. It is important that we review each component of your monthly income to determine what the lender is likely to allow in the underwriting process. In current times, with declining salaries and declining income from investments, many lenders will use more conservative estimates of income and may even disallow certain types of income. It is always important to be able to document the sources of income, the consistency of income in recent years and the likelihood that the income will continue.