Is my income sufficient for a loan?

This question will be answered by an industry-standard model known as the debt-to-income ratio, or simply ‘DTI’. This model is fairly straightforward, and having a conceptual understanding of it before approaching your lender will help ensure a smooth process.  While there are different loan programs – with different thresholds - here’s generally how it works in regards to a conventional loan….

You simply add your current and proposed debt payments in order to get your total proposed debt payments. You then divide that amount by your gross monthly income. This will yield X.  X must not exceed 43%. Examples of variables included in ‘total proposed debt payments’ include: monthly mortgage payment, insurance premium (on a monthly basis), property tax payment (on a monthly basis), minimum payment required on a charge card, monthly auto payment, etc.  Notice that these are debt (or real estate) related items, NOT lifestyle items like gym dues, utility bills, etc.  ‘Gross monthly income’ is simply your salary (or salaries, if there’s a co-borrower) before any deductions.

Here is an example laid out mathematically:

Assumptions

• Proposed mortgage payment (P&I) = $1,250 
• Property taxes (monthly basis) = $250
• Homeowner’s insurance = $100
• Visa payment (minimum) = $50
• Toyota Motor Credit = $350
• Total monthly debt payments = $2,000
• Household gross monthly income = $6,000

Formula

• $2,000  /  $6,000 =  33%

Since this percentage is below 43%, the DTI is acceptable.

While DTI is just one of the factors your lender will consider, it is a critical one. Other factors include credit history, down payment, and collateral value. These are the four main elements to a loan application, and you now have a reasonable grasp on the most complex one (DTI). The others are relatively common sense (or at least more commonly understood).

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