Mortgage Loans – How DTI (Debt-to-Income) Effects How Much House You Can Buy
“How much home can I afford?” is one of the most frequently asked questions by potential homebuyers while using Mortgage Loans.
Typically it includes the minimum monthly payments on all debt, including car loans and leases, credit cards, and personal loans. Monthly alimony and child support, which are not debts, are also included. However, it doesn’t include daycare, utilities, children’s education, life/disability/automobile, or insurance.
Your expected TOTAL home payment, including your PITI or Principle, Interest, Taxes, and Homeowner’s Insurance, is also included. You may need your loan officer’s or real estate agent’s help to figure out your total monthly debts.
Medical students and residents who are about to graduate will understandably wonder whether their student loans will be taken into account after they begin making payments on them. Unfortunately, there is no simple answer to this question.
Unless you can demonstrate that you are on a special payment plan for the next 12 months, a traditional loan will include the full monthly payment on your student loans in the debt ratio. The challenge with this is that proof is typically unavailable to a graduating medical student. It is crucial to talk to your lender about how student loans are handled.
Determining your total monthly income can be challenging, but there are specific rules to help guide you. Base income, whether it’s a W-2 or 1099, is usually included ask your loan officer if their company counts 1099 income. Non-guaranteed income must have been earned for at least two years to be included.
As I mentioned at the beginning, there are other things to think about aside from the DTI (debt-to-income) ratio. Just because you can get a $2 million mortgage for $430,000 doesn’t mean you should. You should not determine how much house you can buy based on your lender’s 50% DTI ratio.
The biggest difficulty physicians encounter when purchasing a home is determining how much they can spend. Many physicians, from residents who earn $55,000 a year to those who earn much more, are unsure of the answer.
There can be different answers, depending on financial and lifestyle factors—neither is wrong, and both should be considered when trying to purchase a home.
The debt-to-income calculation, also known as the debt ratio or DTI
DTI determines how much debt a person can bear, and the result is then used to establish the maximum loan amount a person qualifies for. A consideration of lifestyle, on the other hand, is based on a more comprehensive view of your finances and financial goals.
The DTI is a simple ratio in which total monthly debts are divided by total monthly income. The minimum viable DTI can vary between lenders, even for the same loan product. For example, a 50% debt proportion might be permitted on a physician house loan from one company.
After establishing your DTI, you can then figure out how much money you can borrow by plugging in the maximum monthly payment for your home expenses. For example, if your monthly principal and interest combined were $2,000, your loan amount would be approximately $430,000.
You can calculate this amount yourself by going to a mortgage calculator or having your loan officer do it for you.
Remember, there are other factors to consider besides DTI. Even if a lender offers loans for individuals with a 50% debt-to-income ratio, it’s not a recommended setup for financing. But it’s helpful to know how much you are eligible for, to guide your search for your next home.
We are not a lending company. We help you find the best physician loan on the market.
You can find doctor loans through an online tool like Dr. HomeFinance that compares multiple lenders for you. Simply select which state you are looking at living in and see how much of a house you can afford with the best physician mortgage lenders.