Debt to Income for Mortgages

Mortgages can be a confusing litany of terms and jargon that perplex even the most financially aware borrower. Debt to income for mortgages or debt to income ratios are one such term that often baffles mortgage applicants.

Debt to income for mortgages is quite straightforward once you grasp the basics and in this article, we outline everything you need to know about calculating a debt to income ratio and what lenders are looking for.

Let’s explore debt to income for mortgages in more detail.

What Does Debt to Income Mean?

The debt to income ratio is calculated on the amount of existing debt you have proportionate to your income.

In simplest terms, you could have an income of £2000 a month with £1000 of debt payments each month. This would put your debt to income calculation at 50%.

Mortgage lenders use this ratio to determine how much risk you represent to them if they were to offer you a mortgage.

Of course, the higher the proportion of debt to income will lead to more concern by the lenders. The idea being they want borrowers who are acting within their financial means and not overextending themselves with borrowing.

What Debt to Income is Too High for a Mortgage?

Currently most lenders would consider any debt to income ratio over 50% to be too high for a mortgage.

In some cases, a lender may still consider offering a mortgage, so it is best to speak to a mortgage broker about your debt to income. A mortgage broker will scrutinise your finances and ensure your calculation is accurate and proceed from there.

There is no concrete ratio used across the mortgage industry and each lender assess your debt to income for a mortgage differently.

For example, most borrowers calculate their debt to income ratio incorrectly by not including all income such as child benefit or including financial liabilities that are not traditionally classed as debt.

Your mortgage broker will provide practical solutions to improve your debt to income for a mortgage, such as paying off some of the debt or closing inactive credit card or overdraft facilities.

What Debt to Income is Acceptable for a Mortgage?

Debt to income ratios below 50% but over 30% would be considered medium to high risk for most mortgage lenders.

When you factor in the additional costs associated with owning a property, it is easy to imagine how your spare monthly income could be depleted, and lenders want to ensure you can afford your mortgage.

You may still be able to obtain a mortgage with a debt to income ratio over 30% however you may need to supply additional evidence or set aside money to clear of existing debt. This will depend on which lender your mortgage broker has recommended.

The advantage of using a mortgage broker with a borderline debt to income ratio is they will know which lenders best match your circumstances.

What Debt to Income is Ideal for a Mortgage?

The perfect debt to income ratio for a mortgage lender would be a borrower with no existing debt. Lenders are under no illusion about how unlikely this is and typically view any ratio between 20% and 30% as acceptable.

If you happen to fall in this range your mortgage broker should have no problem sourcing, you a mortgage with your existing debt.

You can also be pro-active and reduce your debt further to secure the highest borrowing from the lender that your mortgage broker recommends.

What Debt is Considered by Mortgage Lenders?

When your mortgage broker applies for a mortgage on your behalf, they will advise you that a credit check is required.

This credit check supplies the lender with any and all existing debt on your credit profile.

These debts will factor into your debt to income calculation and a lender will ask for bank statements to match up outgoing debt payments with your credit record.

Types of debt a lender will be considering are:

This list is not exhaustive and there are other financial products that a lender will evaluate as part of underwriting your mortgage.

Financial Obligations Not on a Credit Report

Sometimes your credit profile will not show all your debts. This is especially the case if your debt falls outside of the Consumer Credit Act like spousal support or child maintenance payments.

Underwriters are adept at identifying other financial liabilities when they comb through bank statements, so it is best to disclose all debt information upfront to your mortgage broker.

Debts are treated completely differently from one lender to another, so you should not be disheartened if you feel your existing borrowing might be too high to get a mortgage.

In fact, debts are treated so differently that one lender might consider a credit card with a zero balance a risk whereas another will not factor it into your calculations.

Which brings us onto an important final point regarding credit cards. Most people assume a credit card with no balance is not a debt, because after all, there is no money owed to anyone.

However, some lenders will look at your borrowing capacity on your credit card and add the amount you can potentially borrow to your debt to income calculation. This is because there is nothing in theory preventing you from maxing out your credit cards once the mortgage offer has been made.

Speak to a Broker

Debt, income, and credit scoring are all uncomfortable words for most people and unfortunately crucial aspects of a mortgage application.

Understanding that it is rare for a mortgage to be out of the question should prove reassuring and a mortgage broker will be best placed to help you navigate the mortgage process.

Boon Brokers is a Whole of Market Mortgage, Insurance and Equity Release Broker. Boon Brokers offers fee free mortgage advice.

Contact Boon Brokers to discuss any debt you have or your mortgage goals today.