What is a debt-to-income ratio, and what moves it?

A client of ours wanted to refinance and keep the house. Everything about the file came down to one credit card. If that card reported a zero balance, the numbers worked. So before anyone talked about anything else, Bri checked how that one account was showing up on the credit report.

That's how a debt-to-income ratio usually works in real life. It's rarely about how much you owe in total. It's about which monthly payments get counted, and how.

What is a debt-to-income ratio?

Your debt-to-income ratio, or DTI, is all of your monthly debt payments divided by your gross monthly income, according to the Consumer Financial Protection Bureau. Gross income is what you earn before taxes and other deductions come out. Lenders use it to judge whether you can handle the payment on the loan you want, and the new house payment goes into the math along with everything else.

Put another way, it's a fraction. The top is what you pay each month. The bottom is what you earn. The CFPB also says different loan products and lenders have different limits for it, which is one reason two lenders can look at the same person and say different things.

Does "a lot of debt" mean I can't buy?

Not necessarily. The ratio doesn't look at your balances the way you do when you add them up in your head. It looks at monthly payments, and only the ones that count.

So a big student loan balance and a small car payment can land very differently than you'd expect. What matters is the payment each one puts on the top of the fraction.

Which debts count?

For the conventional loans Fannie Mae buys, its Selling Guide lists what goes in: installment loans like a car loan or a student loan, credit cards and other revolving accounts, lease payments, court-ordered alimony or child support, garnishments, and a home equity line of credit.

A few of its rules surprise people:

• A loan that's almost paid off. An installment loan with ten or fewer payments left is generally left out, unless the payment is big enough to change what you can handle.
• Credit cards always count. Even if the card doesn't show a payment on your credit report, the lender has to use one, figured from the balance.
• A debt someone else pays. If you're on a loan that someone else has been paying, it can be left out, with the most recent 12 months of canceled checks or bank statements showing the payments were made and none were late.
• Student loans on an income-driven plan. If your plan has no monthly payment right now, the lender can verify that and use it.

Other loan programs have their own versions of these rules, so we look at the file before anyone says yes or no.

What moves the ratio?

There are only two ways to move a fraction. Make the top smaller, or make the bottom bigger.

The top gets smaller when a monthly payment goes away or gets lower. Paying a credit card to zero, like the client above, takes its payment off the top. So can paying down a car loan until it's near the end. The top gets bigger when you add a payment. That's why a new car or a new card right before you buy a house is a bad idea, however nice the car is.

The house payment itself is on the top too. The price, the down payment, the property taxes and the insurance all change it, so the house you pick moves your ratio as much as anything else on the list.

The bottom gets bigger when more income counts. Adding a second borrower's income is the usual way.

Some of these take months to set up, which is the best reason to look early. In Bri's words: "the more we can get lined up and vetted ahead of time, the better your options will be when the time comes."

What can't we tell you yet?

We can't tell you your ratio from a blog post, and we can't tell you today what you'll qualify for. It depends on your actual debts, how they're reporting, your income, and the program that fits you.

What we can do is look at the whole picture, show you which of your payments count, and tell you which one or two things would move your number most. If one of them is something you can fix before you apply, we'll tell you that too.

How do I find out where I stand?

Talk to David or Bri. You don't need to have it all figured out first. If you aren't sure about a question on the application, just skip over it, and we can fill in the blank spots together later. Once we have your file, we manage it from there: we keep track of what the lender asks for and tell you what's needed and when.

We're paid by our company when a loan closes, and you never pay us directly. So yes, we'd like to help you buy the house. We'd also rather tell you now that a card needs paying down than find out at underwriting.

Movement Mortgage, LLC, NMLS #39179. David Chandler NMLS #265974. Brianna Lindley NMLS #1367416. Equal Housing Lender. Not a commitment to lend.