Secret #1 for a Successful Mortgage Application: Lower Your Debt to Income Ratio

Reducing your monthly recurring debt increases the chances your mortgage application will be approved.  

If you are like many people who assume the most important part of your mortgage application is your credit score, you may be in for an unpleasant surprise. While lenders do scrutinize your credit score, the element of your application they consider the most is your debt to income ratio (DTI). In fact, according to the Los Angeles Times, 60 percent of mortgage risk managers weigh DTI as much as five times as much as other considerations of your loan package. What do you need to do to ensure your DTI makes the grade?

The First DTI Component: Home Debt to Income

The first part of your DTI is the ratio of your housing expenses to your income. For the purposes of your loan application, your pre-tax income from all sources needs to be included to optimize your DTI. The loan officer then evaluates in terms of the principal, interest, taxes, and insurance (PITI) associated with the mortgage to which you are applying. According to local mortgage expert Joe Ennis, regardless of whether you are applying for a Federal Housing Administration (FHA) home loan or a mortgage backed by Fannie Mae and Freddie Mac, your housing expenses should your housing expenses should be around 33 percent.

The Second DTI Component: Recurring Monthly Debt to Income

The second component of DTI, often referred to as the “back end ratio” compares all your pre-tax income to your monthly debts that you pay every month. While the federal standard for the backend ratio is 43 percent, the average approved traditional home loan applicant had a ratio of only 34 percent. Even FHA mortgages, with their more lenient lending standards, have an average 41 percent back end ratio.

Before you start house hunting, have a mortgage loan expert review your package to ensure your DTI makes the grade.