Maximum Debt-to-Income Ratio

March 16, 2011

This ratio is the sum of the mortgage payment on your new mortgage, property taxes, home-owners insurance, and other debt payments divided by your income, with everything placed on a monthly basis.

The maximum ranges from 40% to 43%, and underwriters have discretion to accept higher requirements if they believe that circumstances justify them.

If you want to calculate your own ratio, there are detailed rules regarding the measurement of income. In general, the underwriter will allow only income that can be documented and that can reasonably be expected to continue in the future.

Debt payments are those that extend beyond the next 6 months and are not deferred for a year or longer. This includes HELOCs and other revolving credits, credit card debt that you don’t pay off at month-end, student loans, and alimony and child support payments.

Income Used to Qualify


In general, the only income that is included in the calculation of your debt-to-income ratio is the income that can be documented, and that can reasonably be expected to continue in the future. Documentation is the major challenge.

Wage and Salary Income: You must present W2s for the last 2 years, and paystubs covering the last 30 days. In addition, if your income has recently increased or decreased, you need a written statement from your employer (“Verification of Employment”) explaining the reason for the change and whether it is likely to continue.

Overtime, Commission, Bonus and Part-time Income: If you want overtime, commission bonus and/or part-time income to be counted, you must document that you have received it for 2 years, along with the W-2s and paystubs. In addition, you need a statement from your employer that it probably will continue.

Seasonal Income: The rules are the same for a seasonal worker, whose monthly income will be one-twelfth the amount earned during the working season.

Military Income: Documentation rules are the same but if you claim pay above base pay for your rank (jump, hazard, special assignment, etc) you must provide an explanation of why it will continue. The same holds for housing, base and food allowances which can be included in your income if you can prove that they will continue. One-twelfth of your clothing allowance can also be included.

If you are deployed, you must explain in writing that your paystubs do not match your W2’s because you have been deployed to a War Zone and that your income is not taxed.

Business Income Including 1099 Income: You must disclose the last 2 years of tax returns. The income used will be an average of the 2 years, but subject to the various adjustments noted below. You also must report a profit and loss statement for the current year to date to show that your business is still profitable.

The income shown on your tax returns is net of any losses on schedule “C” or from K-1’s, while any income that is viewed as a one-time occurrence will be deducted. If you file a schedule “C” you may add any deprecation from that form to your income for the year.

If you have K-1’s you will need to include all pages and any supporting documentation. If you are self-employed, you must include your paychecks and W2’s in your documentation.

If there is a large difference between the incomes reported in the 2 years, you will need to provide written statements to support the argument for using the larger of the two figures.

Suggested Reading: Difficult For Self-Employed to Qualify For a Mortgage?

Investment Income: Ordinarily, the only investment income that is usable in qualifying for a mortgage is interest and dividends, and these may be discounted, depending on the source. Realized capital gains are viewed as too volatile to rely on. Funds obtained from liquidation of assets don’t count either because it is assumed that they will run out.

Income is always carefully reviewed by an underwriter, and if you have income of an unusual \ nature that you believe to be dependable, put your reasons in writing. Document whatever may be questioned.

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