THE DTI OR DEBT-TO-INCOME RATIO
WHAT IS DTI?
Basically, the debt-to-income ratio (DTI) is how much debt you have compared to your income. Just like credit scores help lenders determine how likely a borrower is to make payments on time, DTI helps lenders determine whether you’ll have trouble making monthly mortgage payments. Lenders view this as a key indicator of how well you manage money, and whether you can afford to take on more debt.
HOW DTI IMPACTS QUALIFYING FOR A HOME LOAN
Your DTI ratio will be a strong factor when determining how much you’ll be approved to borrow, your interest rate, and other loan terms. The lower your DTI, the better. In general, you will need a DTI of 50% or less to qualify for most loan programs. An even lower DTI can result in better interest rates and access to additional loan programs.
Understanding debt can be tricky, but it’s important to learn how it works and what lenders consider when determining if you qualify for a mortgage loan. Keep in mind, while you may want to pay down debt before you apply for a home loan, you might not need to pay it all off. Let’s take a look at a few things that are important to understand about debt.
HOW TO CALCULATE DTI
Now that you understand why DTI is important, let’s look at how you can calculate it yourself. You can figure out your DTI ratio by adding up your total monthly debt payments and then dividing that amount by your gross monthly income, which is the total monthly income before taxes and other deductions are made. Your monthly debt payments may include things like your current or future monthly housing payments, any student loans or car loans, alimony and/or child support payments, minimum credit card payments, or any other fixed or revolving debt.
Note that monthly debt payments do not include bills for things like cell phone, car insurance, utilities, cable, childcare, etc. When you apply for a loan, the new monthly loan payment will become a factor when determining your total DTI vs. what you currently pay for housing/rent.
FOR EXAMPLE:
Your total monthly debt: $900
Monthly gross income: $2,333
TO CALCULATE DTI:
$900/$2,300 = 0.39
0.39x100 = 39% DTA Ratio
Give yourself time to lower your DTI or pay off debt. It won’t happen overnight.