In this day and age, lenders have to be stricter with their requirements on who they approve for home loans. If you are planning on buying a new home and applying for a mortgage the current requirements are very important to know. One of them is your debt-to-income ratio.
Debt-to-income ratio is the percentage of a consumer's monthly gross income that goes toward paying debts. It includes credit card debt, existing mortgages, auto loans, and any other personal debt.
Your mortgage lender will look at your Debt-To-Income (DTI) to evaluate your ability to afford your new mortgage. You should have a good idea of what your DTI ratio is before you approach a lender or consider buying a new home.
Best case scenario, you want to achieve a low DTI ratio. A high number means that you have less disposable income and less ability to maintain the home once you purchase it. With foreclosures at an all-time high, lenders are not willing to assume any additional risk in lending.
Most lenders seek DTI ratios in the 20-36% range or lower, with no more than 28% of debt dedicated to the mortgage itself. While some lenders will consider higher ratios, DTIs in the upper 30% range are considered high risk.
There are several different calculators available online to help you determine your ratio, and you can always check with your financial institution for guidance on determining your DTI ratio.
Here’s a simple formula:
Add all your monthly payments (mortgage or rent, car, credit cards, any other debt payments)
Add your gross income (before taxes), bonuses, alimony, or any other outside income and divide by 12
Then divide the total number in (1) by the final number in (2)
The result is your DTI ratio.
It is always a good idea to know your DTI, whether you are ready to buy a new home or you just want to stay up to date on your financial health. This way you can start taking steps to lower your ratio and become as close to debt-free as you can.
With this said, do you know what your DTI is?