The debt-to-income ratio (DTI) is one of the most important elements in obtaining a mortgage. It tells lenders how much income a borrower can afford to spend on monthly debt payments, including housing expenses, car loans, credit card bills, and more. If the DTI is too high, your mortgage application may be rejected or the lender may not offer you the best possible interest rate.
In order to calculate your DTI, you will need to take your gross income and divide it by your total monthly debt payments. Then multiply the result by 100 to get the percentage. Your debt-to-income ratio should be somewhere between 1 and 100.
You can find out how to calculate your DTI with the help of a mortgage calculator. These tools are a great way to figure out how to pay for a home without racking up huge amounts of debt. However, you should be careful with this calculation. Some lenders will try to work with borrowers who have high DTIs. By putting more money down on the house, buying a more competitive interest rate, or simply waiting until you can qualify for a mortgage, you can lower your DTI.
You should be prepared to talk with a loan officer about these and other potential issues. The good news is that today’s mortgage programs are quite flexible. Lenders want to be confident that you will be able to keep up with your mortgage payment in the years to come. Also, be sure to check current mortgage rates before you start your search for a home. Generally, banks will qualify you at a higher rate than you would find elsewhere.
As with any aspect of the mortgage process, you need to be a little bit cautious. While the front-end DTI is the “magic number,” you also want to make sure that you don’t exceed the back-end DTI. Similarly, you should make sure that your housing expenses don’t exceed 28% of your gross monthly income. This will allow you to protect yourself from underestimating your monthly debt and thereby securing the mortgage at a reasonable price.
A DTI of around 36% is considered a healthy level. It’s better to have a lower ratio, though, as it helps you qualify for a mortgage. And while there are some exceptions, you should know that many lenders are not willing to offer the best rates to borrowers with high DTIs. That’s why it’s important to understand the differences between the two types of ratios and how to improve yours.
Ultimately, a good mortgage is the result of a solid DTI and other elements such as your credit score. Getting a pre-approval on a home purchase will ensure that you know how much you can afford and will also confirm that you are eligible for the loan you are applying for. Once you are approved, a loan officer will explain how to maximize your chances of successfully purchasing a new home.
Getting a mortgage can be scary, but it can also be exciting. Make sure to do your homework before you sign any paperwork, and ask questions of a loan officer who knows what he or she is talking about.