​Do contributions to my Roth 401k affect my DTI ratio?

4 Replies

Hope everyone is having a great holiday!

Do contributions to my Roth 401k affect my DTI ratio (with regard to a conventional mortgage)?

I have a w-2 job. For example, let's say I were to contribute 100% of my salary to my Roth 401k during the first couple months of 2018 until contributions for that year are max'd out (after maxing out, my salary would be deposited into my normal checking account). If I were to apply to get pre-qualified for a loan during or shortly after this time, would my income appear as $0 because no money was deposited into my regular checking account, and instead was put into a Roth (the contents of which I am not accessing)? Or would they see my salary and that I am simply pushing more money than average into a retirement account?

(My husband also has a w-2 job, we both have excellent credit, and have a solid amount in savings, but if I am correct these things should not be relevant to the DTI).

I have found conflicting information on the internet. I'll also try calling around to different lenders after the new year.

Thank you!

@Natalie C. Your income would be based on gross pay / pre-tax income. So if you make $4000 per month salary, you will still get credit for $4000 per month in income for purposes of calculating your DTI, even if you contributed $4000 that month to your retirement plan.

@Natalie C.

Good question. One of my clients had the same question recently.

Retirement contributions typically do not count towards your DTI (debt to income ratio). It does, however, depend upon the lender. Going off topic a bit, some lenders (usually portfolio community banks or private lenders) will look not only at DTI but also "disposable income" to determine one of The Three C's of Credit...Capacity. In other words, does this applicant have the ability to pay the loan back. Let's say you make $1000 per month and have $200 in debt payments, your DTI would be 20%. In this scenario, you would have $800 in disposable income. Now lets say you have $10,000 per month in income, but $3000 in expenses, your DTI is higher at 30%, but your disposable income is $7000. A smaller bank or private lender will look less at DTI and more at the overall Capacity rather than DTI. A GSE (Fannie, Freddie, etc) will typically be more robotic and focus on hard numbers like DTI. If I was underwriting the deal, I would not count your qualified retirement contributions against your DTI, but since you can't touch it without penalty until you're 59 1/2 and since I typically can't come after a retirement asset should the deal go South to collect the deficiency balance, I'll want to make sure you have the disposable income and income stability to cover the Capacity to pay me back. Hopefully that is not "as clear as mud." Good luck!

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