It might sound shocking, but Napa’s homeowners—present and future—have DTIs!
Although the press has been largely silent, it’s important that the public be fully educated on the subject. But before anyone calls an emergency meeting to see what can be done…
The good news is that, despite how dire it may sound, having DTIs isn’t a health menace (even though it is true that Napa homeowners have both front-end and back-end DTIs). In fact, they’re not only not a problem, the truth is that without DTIs, it’s doubtful any of us could qualify for even the simplest Napa home loan.
You needn’t bother Googling “DTIs”—they are Debt-To-Income ratios. So everyone with debts and an income has them. They are quite useful when it comes to predicting the maximum home loan amount that can be handled comfortably. Knowing your DTI will clue you in on how much home you can easily afford. It will also tell the bank or other mortgage lender the same thing—once they verify from your credit history that you are an established bill-paying good citizen.
DTI computations are wonderfully simple. In fact, even without formally knowing how they are calculated, most Napa residents have a feel for what they measure—it comes with paying the bills every month.
The front-end ratio is easy to arrive at. By taking a home loan payment (all-in: principal, interest, taxes and insurance) and dividing it by the monthly before-tax income, you come up with a percentage. A $2,000 mortgage payment with an $8,000 income yields 2000/8000, or 20%. Most lenders would smile on that number; but a maximum of 28% is considered standard for the front-end ratio (although no debt ratio rule is carved in stone).
The back-end ratio is broader. It’s what’s usually meant when “DTI” is cited. Among the bills included are those for credit card and car loan payments, alimony and/or child support, student loans, personal installment loans and payments for co-signed loans (even if the co-signee is paying them). NOT included are other monthly expenses like utility bills, health insurance payments, cell phone and cable bills.
To finish calculating the back-end ratio, just take those debt payments, add them to the home loan payment, then divide that total by income: the resulting ratio comes out as a percentage. An income of $6,000 with debts of $2,500 would yield a DTI of 41.67%, which is within the federal “qualified mortgage rule.” Forty-three percent is the top number officially allowed.
So, a rule-of-thumb like “no more than 28% of debt should go toward servicing a home loan” actually just restates the front-end DTI guideline. Other factors—like credit history and liquid assets available for a down payment—go into the banks’ decision-making, but as soon as you familiarize yourself with your DTIs, you’re talking the lenders’ language!
Call me when it’s time to buy or sell, and we’ll soon be talking all of the dialects that make up Napa’s real estate language!