Why the Debt to Income ratio (DTI) is important when you refinance your mortgage?

When applying for a home loan (mortgage), there are multiple qualifying factors considered such as the debt to income ratio (DTI).

In other words, the ratio of what comes in and what goes out. What comes in are your incomes and/or revenues. What goes out are all your revolving accounts, mortgages, car loans etc on you credit report.

Basically the calculation is done this way:

Monthly income before taxes: $4250
Credit card minimum payment: $850
Car loan: $375
The new mortgage payment: $1550
Taxes and Insurance: $175
Total out: $2950

Expenses / incomes = $2950/$4250= 0.69

In this case, your expenses are too high and your income is too low.... This is not GOOD! Some banks (mostly subprime banks) will let you go up to 55% or so. Most Prime banks will like it a lot lower than that. Even if you have great FICO score, the DTI might bring you from a Prime Bank to a Sub-prime Bank just because your DTI is too high. Once again, ask questions to your loan officer. If they put you into a sub-prime bank, they might charge you more points.

What you need to do in this case (and TELL your loan officer about this) if you refinance, you get some extra cash out, you pay a few credit cards and automatically it brings your ratio down. But you need to have equity in the house to do it or you will not be able to refinance using the regular channels. There are other options but they are costly!

If we wanted to be more complicated there are the front and the back but we don't need to go there for now.

Enjoy!