Debt to Income (DTI) Ratio Overview

The intent of the following article is to review and demonstrate methods that mortgage industry investors use to track and report borrower Debt To Income Ratio (DTI) statistics, by seller, for loans in their servicing portfolio.

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In underwriting a mortgage loan it is necessary to determine the borrower’s ability to repay a loan in accordance with its terms. A borrower’s Debt to Income (DTI) is the ratio of monthly debt payments to monthly gross income. The borrower’s DTI is a key indicator of his ability to repay the loan. Lenders use a Housing Ratio (monthly housing expenses divided by monthly income) and a total DTI ratio (total monthly debt payment including the monthly housing expenses divided by monthly income) as factors in determining whether a borrowers income qualifies for the requested mortgage loan.

For a conforming loan, lenders typically want the borrower to have a Housing Ratio of 28% or less. The housing expenses included in the expense portion of the Housing Ratio equation are the house payment (principal & interest), taxes (state and local real estate taxes), insurance (home and/or private mortgage insurance) and homeowner’s association fees. The combination of principal, interest, taxes and insurance is commonly referred to by the acronym of PITI in the mortgage industry. The Housing Ratio does NOT include estimated monthly utilities – e.g. water and electricity expenses.

To qualify for most mortgage loans the borrower’s Total DTI Ratio must be no greater than 36%. Most lenders consider a DTI Ratio up to 36% within an acceptable range for most borrowers. Typically, when the borrower’s DTI Ratio is greater than 36% the lender will require the borrower to take some type of corrective action, such as paying off consolidating some of their debt, prior to granting the mortgage. Borrowers with a Total DTI Ratio greater than 42% are considered very risky and more than likely will not qualify for a traditional mortgage.

Investors are concerned with the distribution of DTI ratios in their servicing portfolio and the identification of sellers that have sold them a disproportionate number of high DTI ratio loans. The “Reporting Seller Debt To Income (DTI) Statistics” section of this article details steps for creating a report that an investor might use to track and report the distribution of borrower DTI ratios for loans that a seller has delivered to the investor. A disproportionate percentage of loans with a high DTI ratio from a single seller could represent a significant risk to the investor. The Sample Debt To Income (DTI) Statistics Report in this article can be used as a model for a stand alone seller DTI distribution report or incorporated into a comprehensive Seller Scorecard report.

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