What Is a Debt-to-Income Ratio, and Why Does My Lender Care?

What is a debt-to-income ratio when you are buying your first home in Orange County? It is the share of your monthly income before taxes that already goes to debt payments, including the new house payment you are applying for.

I'm Jeanette Nelson, a REALTOR® with Jeanette Nelson Real Estate, Keller Williams Realty, serving Orange County, Huntington Beach, Costa Mesa, Fountain Valley, and surrounding areas. DTI is one of the first numbers I ask first-time buyers to get from their lender, because it shapes almost every decision that follows.

The Consumer Financial Protection Bureau (CFPB) describes DTI as all your monthly debt payments divided by your gross monthly income. Gross income means your pay before taxes and other deductions.

The math is simple:

1. Add up your monthly debt payments. Use the minimum payments that show on your statements.
2. Add the estimated house payment. Your lender will include principal, interest, property taxes, homeowners insurance and any HOA dues.
3. Divide by your gross monthly income.

The CFPB gives this example: a $1,500 mortgage payment, a $100 car payment and $400 in other debts add up to $2,000 a month. With $6,000 in gross monthly income, the DTI is 33 percent.

In Orange County, the house payment is usually the biggest piece. Property taxes and insurance add to it, and a condo or townhome adds HOA dues. That is why your DTI can look fine today and change a lot once a real payment is added.

A lender's job is to make a loan you can repay. DTI gives the lender a quick view of how much room is left in your budget after your existing bills.

The CFPB notes that different loan products and lenders have different DTI limits. Fannie Mae, which buys many conventional loans, publishes its limits in its Selling Guide. For manually underwritten loans, the maximum total DTI is 36 percent of stable monthly income, and it can go up to 45 percent when the borrower meets certain credit score and reserve requirements. For loans run through Fannie Mae's automated system, Desktop Underwriter, the maximum is 50 percent.

Government-backed loans follow their own agency rules. A lender may also set a lower limit than the program allows. Your lender is the only one who can tell you where your file lands.

Fannie Mae's guide lists what goes into the total monthly obligation. It includes:

• Your new housing payment, including taxes, insurance and HOA dues.
• Installment loans with more than ten months left, such as a car or student loan. Shorter ones can count too if they significantly affect your budget.
• Revolving debts, like credit cards.
• Lease payments, such as a car lease, no matter when the lease ends.
• Alimony and child support with more than ten months left.

Everyday bills like groceries, phone, utilities and car insurance are not usually part of DTI. They still belong in your own budget, because a lender's limit is the most you can borrow, not the most you should spend.

You can move the ratio by changing either side of it, the debts or the income.

• Pay down a revolving balance. Lowering a credit card balance can lower the minimum payment.
• Avoid new debt. A new car loan or financed furniture before closing can change your numbers.
• Look at your price range. A lower price, or a larger down payment, lowers the house payment.
• Document all your income. Ask your lender which kinds of income they can count.
• Ask about assistance. CalHFA's MyHome Assistance Program is a deferred-payment junior loan for eligible first-time buyers that can help with down payment and closing costs. Income limits apply, so check the official page for what is open today.

This is general information. Your lender will review your full file, and a CPA can help if your income is complicated, such as self-employment.

For more on getting ready, see how much to save for your first home and what you'll pay at closing.

If you want to know what price range fits your budget, I'd love to help you get clear on it before you start touring. I can connect you with a lender to run your numbers, and then we'll look at homes that fit. Call or text me at 714.366.8575 | DRE: 01397168, or contact me. Jeanette Nelson is a REALTOR® with Jeanette Nelson Real Estate, Keller Williams Realty, serving Orange County, Huntington Beach, Costa Mesa, Fountain Valley, and surrounding areas.