Debt-to-Income Ratio for Kentucky Mortgage Loans:

Check your debt-to-income ratio (DTI).
Mortgage lenders want to know how much debt you have compared to your income. It’s called your debt-to-income (DTI) ratio, and the better it is, the better mortgage terms you’ll get.

Find your DTI by plugging your financial numbers into Trulia’s affordability calculator. The percentage is found by dividing your debt by your income. For example, if your total debt is $3,000 a month (including your new mortgage payment), and your gross income is $6,000 a month, your DTI would be 50%.

Lenders typically prefer DTI to be no more than 36%—although some types of mortgages allow for a DTI of 50%. To lower yours, you can pay down debt or bring in more income.

One of the main pieces of an FHA loan approval is the borrower’s debt to income calculation. It is important that home buyers understand how this number is calculated and what they can do to improve their chances of getting approved.

Payments Included in Debt Ratios

Certain payments must be considered as part of a person’s overall debt when calculating the ratios. Items such as:

• Payments for car loans
• Payments on credit cards
• Payments on unsecured loans
• Child support payments
• Alimony

Items Excluded from Debt Ratios

There are also some items not included in the debt to income ratio for FHA loans. Common examples would be:

• Current rent payment
• Money spent on entertainment
• Expenses paid for child care

How to Overcome High Debt to Income Ratios

If a borrower has a compensating factor, it is possible for people with ratios higher than the proposed guidelines to get an approval for an FHA loan. Here are some examples of compensating factors:

• Paying more than 10% of the purchase price as a down payment
• Using income and expense records from the past two years to demonstrate that you have the ability and discipline to pay the housing expense
• Having a large balance in a savings, investment or retirement account

For people that have a high debt to income ratio, it is possible to reduce the numbers. Paying off debt, such as credit cards or car loans can help. Sometimes it may be necessary to sell an expensive vehicle and get a cheaper payment in order to qualify for a loan.