How USDA Loans Calculate DebttoIncome Ratios
Calculate how much you can borrow for a USDA loan.
Lenders
use your debttoincome ratio (DTI) to determine how much money you
can borrow for a mortgage. The USDA has strict guidelines when it
comes to debt to income ratios.
In order to qualify for a USDA loan, your debt to income ratio for
your monthly payment must be 29% or less. The backend ratio is also
called the debt ratio, which is the total amount of monthly debt
paid each month. The back end ratio also includes the new mortgage
payment.
You divide the mortgage payment by the gross annual income to arrive
at the frontend debt ratio. The only solution to a high debt ratio
is to reduce or payoff debt and or lower the anticipated mortgage
payment to get the backend debt ratio below 41%.
For example, if your monthly housing expenses are $1,500 and your
monthly gross income is $6,000, your DTI would be 25 percent.
Most lenders prefer a DTI of 41 percent or less, but some lenders
may allow a DTI up to 45 percent.
Your DTI includes your housing expenses, plus any other monthly debt
payments. This includes car payments, student loans, and credit card
payments.
Your DTI also includes monthly housing expenses for all borrowers on
the loan. This includes monthly mortgage payments, homeowners
insurance, and property taxes.
If you have a lot of debt, you may not be able to qualify for a
mortgage. You can work to reduce your DTI by paying off debt or by
refinancing your mortgage to a lower interest rate.
If you’re having trouble qualifying for a mortgage because of your
DTI, you may want to consider a governmentbacked loan.
Governmentbacked loans have more lenient DTI requirements.
A USDA loan is a governmentbacked loan that is available to
borrowers with low to moderateincome. To qualify for a USDA loan,
your DTI cannot exceed 45 percent.
USDA Debt to Income Ratio Guidelines
The USDA has strict guidelines when it comes to debt to income
ratios. In order to qualify for a USDA loan, your debt to income
ratio must be less than 29%.
This means that your total monthly debt payments (including the
mortgage payment) cannot exceed 29% of your monthly income.
There are a few factors that can affect your DTI, including:
 The size of your down payment
 The term of your mortgage
 The interest rate on your mortgage
 The type of mortgage you choose
 Your credit score
Your debttoincome ratio is just one factor that a lender
considers when you apply for a mortgage.
To get the best mortgage rate and terms, you’ll want to make sure
your credit score is in good shape and that your monthly debt
payments don’t exceed 43% of your monthly income.
Just
how much house can you afford? The answer lies in your debt to
income ratio.
There are
two DTI calculations, the payment ratio often called the frontend ratio
and the second calculation take into consideration the proposed
mortgage payments along with monthly debt obligations. For example:
Frontend ratio (29%)  Backend ratio (41%) 



How to Calculate the Debt to Income Ratio for a USDA Loan?
The debt to income calculation is simple enough. You divide the
mortgage payment by the gross annual income to arrive at the
frontend debt ratio. Here's an example:
USDA Front End Ratio
Loan payment  $1,000 divided by the gross monthly income. In this example, we'll assume the monthly income is $5,000. Dividing $1,000 by $5,000 equals 20%. Perfect! 20% is less than 29%.
USDA Back End Ratio
Now we'll take a look at the backend ratio. The backend ratio is also called the debt ratio. This calculation includes the proposed mortgage payment (principal and interest, 1/12 of the real estate taxes and homeowner's insurance, and mortgage insurance premium if applicable), plus monthly debts.
Let's assume the monthly payment and all of the reoccurring monthly
debts total $2,000. Divide $2,000 by the monthly income of $5,000
and you have a backend ratio of 40%.
But what if the monthly debt totals $2,000? Take the mortgage
payment + monthly debt ($3,000) and divide the total by $5,000.
$3,000/$5,000 = 60%. Whoa! A 60% debt ratio is much greater than the
USDA guideline of 41%. The only solution to a high debt ratio is to
reduce or payoff debt and or lower the anticipated mortgage payment
to get the backend debt ratio below 41%.
Ten month exemption
Most debt obligation are not required to be brought into the debt calculation if the remaining debt balance is less than 10 months. Here's what the USDA manual has to say about debt lasting ten months:
"Provided the credit report, creditor verification, or other evidence indicates that ten or less months of repayment remain, the monthly debt may be ignored if the payment does not exceed five percent of the monthly repayment income."
"Installment debt may be paid down to a balance of 10 months or less."
It should be noted that the underwriter has the final say on ignoring debts with less than 10 months. If he or she believes the remaining debt payments represent a financial hardship, the underwriter may let the short number of payments remain, which in turn will increase your back end ratio. Ouch!
The USDA provides a clear understanding of debt obligation.
>USDA underwriting manual
Conclusion
In conclusion, it is important to be aware of the USDA Debt to Income Ratio Guidelines when considering a home loan. Knowing these guidelines can help you determine whether you are likely to qualify for a USDA loan and what size of loan you may be eligible for. If you have any questions, be sure to consult with a mortgage lender or housing counselor.
SOURCE: USDA Chapter 11: Ratio Analyis
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