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Debt-to-income ratio (DTI) is the percentage of your monthly debt obligations to your gross monthly income. Generally the DTI should not exceed 43%. Compensating factors like high credit score, low loan-to-value ratio, and significant cash reserves after closing can offset a higher DTI ratio. Below are a few pieces of information considered in the debt-to-income ratio.
Housing expenses: principal payments on the mortgage, interest payments, property taxes, and insurance payments are factored into DTI.
Installment debts: credit cards or any other debt you repay every month is considered the debt-to-income ratio. If less than 10 payments remain on any installment debt, it will not be considered as a monthly debt obligation. Auto leases are always considered because even if the current lease has less than 10 payments, it is assumed that the lease will be renewed or replaced.
When lenders calculate the debt-to-income ratio they are also considering the stability of your employment history. Two years of employment signifies the stability of your employment status. If you are a W2 employee with less than 2 years of work history, it does not mean that you will not qualify. For self-employed applicants, lenders will average the last two years of their income. There are always exceptions to the guidelines, depending on the lender.