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asked Jan 8, 2019 in General Financing by Michael

1 Answer

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Hello, Michael, and thank you for your question.

There are several ways to interpret your question, so I'll address taxes in the many different ways they pertain to mortgage applications.

First, if you're thinking "property taxes," they do count. Your prospective housing expense, including mortgage principal and interest, property taxes, homeowners insurance and homeowner association dues (if applicable) all count in your debt-to-income ratio, or DTI.

If you're asking if your income tax rate counts in your DTI, the answer is "no." Your DTI is calculated based on your gross (before tax) income. Not your after tax income.

If you are self-employed, your DTI is based on your taxable income (with certain adjustments for depreciation and other deductions that don't affect your cash flow). Not your gross (before deductions) income.

Whether you are in a 10 percent tax bracket or  35 percent tax bracket is not considered when underwriters perform DTI calculations. Nor is the tax rate of the state in which you live.

There is ONE exception to this rule about taxes and DTI, and it can work to your advantage. If you have non-taxable income, lenders "gross up" your income, generally by 25 percent. So $1,000 a month in a non-taxable Social Security payment becomes $1,250 a month for mortgage qualifying purposes.

Hope that covers your question. Please fell free to write back if you'd like more information, and thank you for getting in touch.
answered Jan 8, 2019 by GinaPogol (47,650 points)

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