How is the debt-to-income ratio calculated for mortgage qualification?
Debt-to-income or DTI is a rather significant figure that is employed by the lenders to assess the borrower’s aptitude to manage the monthly payments and debts. Here’s a detailed look at how the DTI ratio is calculated for mortgage qualification in Dubai:
What is Debt-to-Income Ratio?
The formula for DTI ratio is percentage with references to overall monthly obligations and gross monthly wages. This is a crucial aspect that is used by the lenders in order to decide whether you are capable of affording a mortgage or not, and if so, then the amount of money that you will be provided with.
Types of DTI Ratios
- Front-End Ratio: This ratio is related to debts connected with housing. This amounts to; monthly instalments on the mortgage, property taxes, homeowners insurance and the annual homeowner association fees. The formula is:
- Front-End DTI = ( [The sum total of housing expenses for the month]/ [The gross amount of income for the month] ) x 100
- Back-End Ratio: This ratio includes all forms of monthly obligations such as housing, car, credit card, student, personal loans among others. The formula is:
- Back-End DTI = (Total Monthly Debts Moralities / Total Gross Monthly Salary ) x 100
Steps to Calculate DTI
- Calculate Total Monthly Debt Payments: Add up all the sum of minimum monthly payments for debts. This includes:
- Housing expenses
- Vehicle loans
- Student loans
- Credit card’s minimum payment
- Personal loans
- Child support or alimony
- Exclude expenses that do not involve the payment of debt such as utility bills, health insurance and others.
- Determine Gross Monthly Income:
- This is the amount of money that you earn in a given time before you are taxed or given other deductions. For the other employees, it is usually included on your paycheck if you are a employee earning salary. Freelancers and business owners should use their tax returns or income statements.
- Calculate the DTI Ratio:
- DTI Ratio = (Total Monthly Debt Payments / Gross Monthly Income) × 100
- For instance, assuming that your total monthly debt payments are 5000 AED while your gross monthly income stands at 20,000 AED then;
- DTI Ratio = (5000/ 20000) × 100 = 25%
Why is DTI Important?
Credit bureaus and lenders generally utilize the DTI ratio to gauge your financial state and your risk profile. A lower DTI ratio tells your creditor that you are well mannered with your earnings can handle your loans better making you a better candidate for credit. Ideally, an acceptable DTI should not exceed 36%. According to my understanding, a lower DTI ratio is preferable owing to the expenses it embodies. Such ratios if exceeded may reduce the variety of mortgage products you could qualify for or lead to higher interest rate.
Quiz: Debt-to-Income Ratio for Mortgage Qualification
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