Your credit report and credit score aren’t the only factors that can impact your ability to obtain a home loan. Another factor you should be familiar with is your debt-to-income (DTI) ratio. It’s a way for lenders to assess your ability to pay back your
loans. Why Debt to Income Ratios Matter
Your DTI ratio is calculated by taking the sum of your monthly debt payments and dividing by your gross monthly income. If you have a low DTI ratio, it means you don’t have excessive debt to pay in relation to your income. A high DTI ratio means a large
chunk of your income goes toward paying off debts. This can cause some lenders to see you as a high risk—potentially leading to the rejection of your loan application. Realistically, a high DTI ratio can simply be hard to manage without missing payments.
If you’re hoping to get a mortgage soon, you’ll want to be mindful of your DTI ratio. Many lenders aren’t able to offer a Qualified Mortgage unless the borrower’s DTI ratio is 43% or lower. Qualified Mortgages are meant to provide extra protections
to consumers and are less likely to result in a borrower defaulting on their loan.
So, if you want to be eligible for a more accessible mortgage with potentially lower rates and fees, you’ll need a low DTI ratio.
Calculating Your DTI Ratio
Here’s what calculating your DTI ratio may look like:
Say you currently make payments of $1,200 on rent, $300 on a car loan, $350 on a student loan and $50 on a minimum credit card payment. In total, that’s $1,900 in monthly debt payments. Payments such as utilities and insurance premiums aren’t
included—only debts that appear on your credit report.
Next, determine your monthly gross income, which is your pre-tax, pre-deductions income. If you make an annual salary of $48,000, that equals $4,000 per month. Take the $1,900 in debt payments and divide by $4,000. The result is a DTI ratio of
If you find yourself with a higher than desired debt-to-income ratio, try making extra payments on your recurring debt - over time, a little extra goes a long way!
Please consider The Myers Team your resource for all things real estate. We have over 32 years of real estate experience, specializing in (but not limited to) the Montgomery County area. If you are refinancing, want a recommendation, need a service provider or just have a home related question, please give me a call at 301-910-9910 or email me at email@example.com.