The debt-to-income ratio is a very important factor to consider when you apply for a mortgage. Lenders want to be sure that you have the capacity to pay off a loan before they agree to offer you a loan. A higher DTI can increase your risk of defaulting, which is a risk lenders do not want to take. By paying off any existing debts, you can reduce your DTI.
To calculate your DTI, you need to know your gross income. You can do this by checking your paycheck stubs or by taking your gross monthly income and subtracting your monthly debt payments from it. Your total amount of monthly debt should not exceed 43 percent of your income.
If your monthly debt payments are more than 45% of your monthly income, you may have a difficult time getting approved for a home loan. This is because most lenders prefer to see a front-end DTI of no more than 28 percent. In addition, most lenders are willing to work with borrowers who have a co-signer who has a healthy credit history. However, you may have to wait until you can get a better mortgage rate if your co-signer does not have a great credit rating.
Once you know how much you can afford, it is a good idea to check the current mortgage rates. Banks and other lending institutions will often qualify a borrower at a higher interest rate than the average homeowner. So, if you have high debts and a high DTI, it is best to wait until you have more money saved up to buy a house.
One way to improve your DTI is by making more money. For example, if you are currently working at a job that pays too little, try finding a new position that pays more. Additionally, you can make payments on your existing debts, such as your student loans or car payments. When you have more money to spare, you can increase your down payment and decrease your debt-to-income ratio.
A lender will also look at your debt-to-income ratio when determining the maximum mortgage amount you can borrow. As a rule of thumb, lenders will not approve a mortgage for a loan where the total amount of debts exceeds 40 percent of the applicant’s gross monthly income. Similarly, if your monthly expenses exceed 28% of your gross income, the lender will not accept your application.
If you have a high DTI, you may be able to lower it by refinancing your mortgage. However, this is not always a great option. Instead, you might have to put more down, pay off some of your debts or pick up a part-time job to make up the difference.