# How is "Income" Defined in Debt-to-Income (DTI) Ratio?

4 Replies

A family member of mine is looking to get a Fannie Freddie loan for an investment property. He had a stable job in the same industry for the previous 20 years, but was unemployed for the past 18 months. About a month ago he got a new job in the same industry again.

I was told that in order to qualify for Fannie Freddie loan, DTI ratio needs to be under 45%. The question is: How is income counted for him?

Scenario #1

If you look at the income from his new job's paystub for the past month x 12, his DTI will be under 45%. Hence - Qualified.

Scenario #2

If you look at his last year's W2 or his year-to-date income, his income has been zero until he started his new job a month ago. DTI will be above 45%. Hence - Not qualified.

Scenario #3

If you look at his employment history before he was unemployed, he was having stable income for 20 years. DTI was under 45%. Hence - Qualified.

Which scenario is true when lender calculates DTI ratio?

Thanks.

Nope, he is not getting a loan.  Probably at least a year, to two, wait.

Originally posted by @Manson C. :

A family member of mine is looking to get a Fannie Freddie loan for an investment property. He had a stable job in the same industry for the previous 20 years, but was unemployed for the past 18 months. About a month ago he got a new job in the same industry again.

I was told that in order to qualify for Fannie Freddie loan, DTI ratio needs to be under 45%. The question is: How is income counted for him?

Scenario #1

If you look at the income from his new job's paystub for the past month x 12, his DTI will be under 45%. Hence - Qualified.

Scenario #2

If you look at his last year's W2 or his year-to-date income, his income has been zero until he started his new job a month ago. DTI will be above 45%. Hence - Not qualified.

Scenario #3

If you look at his employment history before he was unemployed, he was having stable income for 20 years. DTI was under 45%. Hence - Qualified.

Which scenario is true when lender calculates DTI ratio?

Thanks.

Here is a real lending answer, since he was off work for more than 12 months he will "generally," need min 6 months on the new job and we can only use his salary or base income only. The other variable income such as bonuses, commissions, overtime, etc will need min 12-24 months to use these sources.

So if his Income is projected to be 50,000 + 45,000 in commissions then we'd only use 50,000/ 12 = \$4166.67 per month till month 12-24 in which we may consider his variable income sources. In most cases underwriters want to see full 2+ years to use variable sources however I've seen it used in 1 year or longer.

The above scenarios do not matter as long as he can document atleast 2 full years of employment sometime in his past he will be fine.

The saying that there are small truths in everything is somewhat true.

Its just that we have to have the discerning ear to pick out what is actually signal or truth and discard the noise or the rest of it.

BP is no exception, lots of signal, and lots of noise.

@Albert Bui Thank you. Love the detailed explanation!

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