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If you are new to home-buying, you may hear your realtor or Loan Originator talk about your DTI or debt-to-income ratio. Your DTI is a very important factor for lenders when deciding whether to give you a mortgage. We will quickly break down the debt-to-income ratio and how it is calculated.
What is the Debit-to-Income Ratio?
Your debt-to-income ratio is a percentage of essentially your debt vs your income. The ratio tells lenders how much money you spend on monthly debt payments versus how much money you have coming in. In other words, your DTI will help determine if you can comfortably pay your monthly mortgage payments and that you are not taking on more debt than you can handle. The higher the DTI, the more likely borrowers will default on their mortgages.
How is the DTI Calculated?
If you are not a math person, no need to fret. Calculating the DTI is simple. Just add up your monthly minimum debt payments (credit cards, current mortgages, car payments) and divide that number by your monthly pretax income. Let’s say your monthly debt payments are $2,000 and your gross monthly income is $5,000. Then your DTI would be 0.40 or 40%.
General Standards for DTI
It is important to note that each loan product (Conventional, FHA, etc.) has DTI requirements. In addition, each lender may also have specific DTI requirements. In general, a DTI of 35% or less is ideal. It means your debt is at a manageable level and you may even have money left over to save or spend after you’ve paid your bills.
If your DTI is higher than 35%, you may want to consider lowering it by paying off some debt, but consult your Axia Mortgage Specialist before – you’ll want their advice on which debt to pay off. You may not necessarily be denied a loan, but lenders may ask for additional eligibility criteria (i.e., higher down payment) to ensure that you can pay your monthly mortgage, along with your other monthly payments.
How to lower your DTI
The easiest way to lower your debt-to-income ratio is to pay off some debt. The less debt you have, the lower your DTI. Other tips include:
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- Increase your monthly income (i.e., second job)
- Pay off high-interest debt
- Ask creditors to reduce your interest rate
- Avoid purchases with credit
If you have any questions about your DTI, be sure to reach out to your Axia Mortgage Specialist.
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