How Debt-to-Income Ratio Affects Your Mortgage
What is DTI?
DTI stands for “debt-to-income” and refers to the ratio of your monthly debt payments over your monthly gross income. Essentially, DTI compares your overall debt to your overall income. This calculation is used by mortgage lenders to determine if you qualify for a mortgage loan or not.
Your DTI gives mortgage lenders an accurate understanding of how much of your income is already going toward paying off pre-existing debts and how much you have available to put toward a mortgage payment. The less debt you have, the easier it will be for you to secure a mortgage.
How to Calculate Debt-to-Income Ratio
To calculate your debt-to-income, begin by adding all your monthly debt payments. Then divide your total monthly debt payments by your total monthly gross income. You will want to include your future mortgage payment into your DTI as this is how loan specialists calculate your DTI.
As a rule, your total DTI should not exceed 36% to 43% of your gross monthly income, but the requirements vary depending on what kind of mortgage you want to qualify for.
How to Improve Your Debt-to-Income Ratio
Improving your DTI can increase your purchasing power. You could potentially qualify for a larger mortgage, expanding your options. A lower DTI can also help you secure a lower interest rate on your mortgage.
The best way to improve DTI is to pay off as much of your consumer debt as possible before applying for a mortgage. While you will want to pay off as much debt as possible, you do not want to close accounts or credit lines as this can be harmful to your credit score.
Another way to lower your DTI is by bringing a co-borrower to purchase your home with you. Co-borrowers are most often spouses, but they can also be other family members. Lenders use the combined income from you and the co-borrower for qualifying purposes. But keep in mind that underwriters will examine both credit reports. So ideally, the less debt you both have, the better.
Contact a Loan Specialist
The best way to determine if you are ready to purchase a home is to contact a loan specialist. Our loan specialists at VetearnsLoans.com will walk through the loan approval process and ensure you have everything you need to qualify for a home loan. Call 1 (888) 232-1428 today to speak with a loan specialist and begin the pre-approval process!