There are so many moving parts to the homebuying process, and as a new homeowner it can be easy to get lost. A key factor in determining if you qualify for a mortgage is your debt-to-income ratio (DTI).
So What is Debt-to-Income Ratio?
A debt-to-income ratio is an important marker that helps lenders determine their risk if they offer a borrower a loan. To calculate your DTI, you’ll need to know: what debts you owe monthly, such as credit cards and car payments, and your monthly pre-tax income. When you have those numbers, simply divide your debts by your income and you’ll get your current DTI. Lenders will confirm your DTI and then calculate it with your potential mortgage to see if you could afford it.
For example, say your monthly debts are $7,000 and your monthly pre-tax income is $12,000, then your current DTI would be 58%. When you add in a $2,500 monthly mortgage payment, your prospective DTI would be 79%, which would be extremely high.
Why is DTI Important?
When looking for mortgage approval, your DTI, along with your credit score, is essential. It’s an important factor lender will use to review your borrowing history and how well you repay your debts. According to the Consumer Financial Protection Bureau, most lenders want your DTI to stay below 43%. A DTI above 50% means more money goes toward your debts every month than anywhere else. This DTI would indicate to the lender that you might be unable to make payments in the future because you have so many other expenses per month to cover.
Improving Your DTI
There are two ways to lower your DTI: make more money and cut back on your expenses. You could do these by potentially acquiring a second job, reevaluating unnecessary costs or paying off any student loans debts. By improving your DTI now, it will set you up for a better financial future. If you need help reevaluating your budget, chat with one of Loan Advisors today – we’re ready to guide you to homeownership.