Does My Debt To Income Ratio Affect My Mortgage Rate?

By Ann White

A debt to income ratio is the percentage of a borrower’s monthly gross income that goes toward paying debt. To analyze your debt to income ratio (DTI) for a home loan, you must know how lenders set the limits. Once you understand this, you will see how it can affect your mortgage rate.

Debt To Income Ratio

There are two types of ratios used. The front-end ratio is the percentage of income used for housing costs including mortgage, principal, interest, insurance, taxes and dues (when applicable). The back-end ratio includes all front-end costs for housing, plus recurring debts, such as car loans, credit cards, student loans, alimony and child support payments. For qualified borrowers, conventional financing limits require ratios of 28/36.

Conventional Home Loans (FHA and VA differ)

Here is an example of the formula used by mortgage lenders. Yearly gross income = $50,000/divided by 12 = $4,166/month income.

$4,166/month x .28 = $1,166.48 allowed for housing expense
$4,166/month x .36 = $1,499.76 allowed for housing expense plus recurring expenses

Your debt to income ratio accounts for 30% of your total credit score. Lenders like to see high credit available, with very low use of it and a great payment history in your credit file. These borrowers have higher credit scores (aka FICO scores) and indicate a lower risk to the lender.

Mortgage Rates

Most lenders set mortgage rates according to your credit history and FICO scores obtained from the three credit agencies. Based on national average, for a 30 year fixed loan with a $300,000 purchase price, currently, a FICO score of 760-850 carries a mortgage rate of 4.471%, although a FICO score of 620-639 has a rate of 6.060%.

Does My Debt To Income Ratio Affect My Mortgage Rate?

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