What is Debt-To-Income Ratio ?
Debt-to-income ratio (DTI) divides the total of all your monthly debt payments by your gross monthly income, producing a percentage. Like your credit score, lenders consider your DTI to be a strong indicator of your financial picture and your ability to repay a loan.
Monthly payments would include credit cards, student loans, personal loans, auto loans, child support, and mortgage payments. Other financial obligations such as groceries, utilities and gas are not considered as debt in the calculation.
Here is an example on how to calculate your debt-to-income ratio.
Monthly Debts: $1,000 mortgage payment + $350 car payment + $100 credit card payment = $1450
Monthly Income: $4,000
$1450 / $4,000 = a DTI of 36%
What is Considered a Good Debt-To-Income Ratio ?
As a rule, the lower your DTI percentage, the less risky you are to lenders. The actual percentage required to qualify for a loan varies among different loan products, but generally speaking, buyers should take actions to lower their DTI if it exceeds 43%. Each lender sets its own debt-to-income ratio requirement and higher DTI percentages may be accepted based on loan type, down payment, housing expense ratio and credit score. For example, VA loans allow higher debt-to-income ratios than other loans. Consult with your mortgage lender on your specific loan requirements.
How to Improve Your Debt-To-Income Ratio
Ultimately, in order to lower your DTI percentage you will need to increase your income or lower the amount of monthly debt.
The first action you can take to lower your debt is to pay your credit cards down. Are you making the minimum payments? Try doubling the payment if possible.
When deciding on which card to pay off first, people typically choose the card with the highest interest rate, which certainly makes financial sense. But if you are trying to lower your DTI to qualify for a loan or get a better interest rate, prioritize paying off debts with the highest monthly balance. This way those high monthly payments will be completely eliminated from your DTI ratio.
More tips to financially prepare for buying a home:
About Oakland County Mortgage Lender, Julie Krumholz
Julie Krumholz is a mortgage lender that serves Oakland County, Macomb County and the entire state of Michigan. She has over 30 years in the mortgage industry and brings a wealth of experience to her clients.
Are you ready to see if you qualify for a home loan? Or need more information on how to improve your debt-to-income ratio or credit score? Contact Julie Krumholz from Superior National Bank at: 586-382-5482 and let her help you navigate through the loan process.