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I did not find an exact answer, so I wanted to double check. From what I understand, the Debt to Income ratio is based on my current monthly debts divided by my monthly income.

I was talking with a lender in Oklahoma, USA, about a HUD 184 Native American home loan, and part of the qualifications were my Debt to Income ratio. After considering my student loans and income, he explained to me that he was including the loan I was applying for.

My question is, When applying for a home loan, is the Debt to Income ratio supposed to include the amount I am applying for?

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Let me use a reductio ad absurdum argument for a minute. (A special case of which is proof by contradiction.) Wikipedia summarizes reductio ad absurdum as

a form of argument which attempts either to disprove a statement by showing it inevitably leads to a ridiculous, absurd, or impractical conclusion, or to prove one by showing that if it were not true, the result would be absurd or impossible.

With the preliminaries out of the way, let's dig in...

The intention of having a debt to income ratio limit in the first place is to ensure that debtors don't take on more debt than the lender can expect the debtor to be able to service. (To service a debt is to make interest and capital payments on the loan amount according to the payment schedule of the loan.)

Suppose that the debt to income ratio that a lender would look at does not include the loan under consideration, but rather only your previous debts.

In that case, a person who has zero debt outstanding to begin with could borrow any amount, because as long as they have a non-zero income, their debt to income ratio would be zero.

Since there exists some upper limit on how much debt a person can service given any particular level of income, this means that going by debt to income ratio alone, by excluding the loan under consideration, a person could easily borrow far more than they are able to make good on.

This is clearly not reasonable from the point of view of the lender, who presumably want you to be able to make both interest and capital payments.

Consequently, the debt to income ratio as considered by the lender must include the loan under consideration.

  • +1 - you had me at "reductio ad absurdum." I was thinking a similar thing, but didn't want to show any hint of sarcasm. I think you did an admirable job avoiding that. – JoeTaxpayer Mar 3 '17 at 15:18
  • @JoeTaxpayer Sometimes the most effective way of illustrating something is to draw the opposite to its logical conclusion. – a CVn Mar 3 '17 at 15:20
  • Thanks for the information. I could understand why they do it, but the exact reasoning did not come to me. As a way to prevent people from borrowing any amount makes person sense though, and i was trying to make sure a lender wasn't trying to screw me over. Part of the confusion, is that after the initial application, the lender did not include the loan amount in the Debt to Income ratio, and since then it's been a trying experience that is making us look to another lender. Thanks for the help though. – dakre18 Mar 3 '17 at 17:13
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    In math, this is called "proof by contradiction". – JAB Mar 3 '17 at 20:02
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Yes. The old fashioned, well qualified loan would use D/I ratios of 28/36, 28% maximum on mortgage, property tax, and insurance, and 36% for that plus any other revolving debt. These numbers include the mortgage you are applying for.

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