Borrower Debt To Income (DTI) Ratio OverviewIn 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 borrower’s 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.
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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