How do I calculate my debt to income ratio for a San Diego Home Loan?

Calculate Debt to Income Ratio
Can I Qualify for a Loan Based on my Income?

One of the most important steps in being able to determine if you qualify for a San Diego Home Loan is to calculate your debt to income ratio (DTI).  The debt to income ratio tells an underwriter if you earn enough income to be able to afford the new mortgage.

If you are looking to get pre-approved for a San Diego Home Loan and are wondering how much you can afford, you may want to try calculating your own debt to income ratio.  Let me explain in a little more detail what a debt to income ratio is and how you go about calculating them.

There are actually 2 different debt to income ratios that are considered by underwriters.  There is a “Front” end ratio and a “Back” end ratio.  Let’s explore each.

Front End Ratio – San Diego Home Loans

The Front end ratio is a very simple calculation.  It is the total new housing payment consisting of the mortgage payment, property taxes including any potential Mello Roos, homeowners insurance, mortgage insurance, and HOA fees, divided by your gross monthly income.  The Front end ratio is not as critical as the back end, but some programs do have a maximum of 36%-38%.

Back End Ratio – San Diego Home Loans

The Back end ratio takes into account the total housing payment as well as your other debts.  This would include credit card payments, car loans, student loans, alimony or child support, and any other mortgages you may have.  The total monthly debt would then be divided by the total monthly gross income to give you the back end or total debt to income ratio.

Most San Diego Conforming Loans will allow up to a 45% DTI, San Diego Jumbo Loans may be as low as 40%, and FHA Loans may allow up to a 50% DTI.  Many times it depends on the strength of your total loan application.

How do I calculate my Gross Income?

Calculating your gross monthly income could be easy or more difficult depending on your form of employment.  A San Diego Mortgage Broker is first going to determine if you are paid hourly, salary, or self-employed.

If you are an hourly employee, you will need to take a 2 year average based on your last 2 years W2s.  If you have recently received a raise, many times that can be taken into account, but it will have to be averaged in addition to the previous 2 years.

If you are salary, your gross income will be calculated based on your most recent W2 or your most recent paystubs.  If you are going to use paystubs, simply determine if you are paid monthly, semi-monthly, or bi-weekly because this could affect your gross income calculation.  Then take your gross pay on your paystub and multiply by the appropriate time period.

If you are self-employed, mortgage brokers will have to analyze your previous 2 years tax returns to determine your gross income.  If your income shows on a Schedule C, you will take your adjusted gross income and add back on any depreciation, depletion, and business use of home write offs.  You will subtract any meals and entertainment.  This will give you the annual income that we can use to qualify.

If you own rental properties, have an S-corporation, C-corporation, or Partnership, your calculations could be much more complicated.  Please feel free to contact me to discuss your situation in more depth.

Example of Calculating DTI

Let’s look at a simple example.  In this example we will use a San Diego Home Loan that allows for a 36%/45% DTI.  If the borrower’s monthly gross income is $6,500, then they could qualify for a total mortgage payment of $2,340 as long as their other debts do not exceed a total of $585 per month.

$6,500 X 36% (front end ratio) = $2,340

$6,500 X 45% (back end ratio) = $2,925

$2,925 – $2,340 = $585 max monthly debt

As a San Diego Mortgage Broker, I would be happy to help you determine your debt to income ratio or help you get pre-approved.  You can call me at 858-519-3935 or email me at shannes@rwmloans.com.   You can also get a free San Diego Mortgage Rate Quote HERE.  I look forward to helping you in any way I can.

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