What is The Debt-to-Income Ratio (DTI)?
If you’re considering buying a home, it’s important to understand your debt-to-income ratio (DTI). DTI is a measure of your debt payments divided by your gross income. The DTI ratio is calculated by lenders when applying for a loan. The answer to the equation will allow the lender to measure if you will be able to repay the borrowed amount without any difficulties. A high DTI can make it harder for you to get a mortgage. But don’t worry – there are ways to lower your DTI and improve your chances of getting a loan. Keep reading to learn more!
How to Calculate Your Debt-to-Income Ratio
If you want to calculate your DTI ratio by yourself, here is a simple and quick example.
- Your monthly debt – all the loans, existing mortgage, and bills you have to pay on a monthly basis.
- Your gross monthly income – the amount of monthly income you earn before paying the taxes or any other deductions are taken out.
For this example, let’s suppose you make $5,000 per month as your gross monthly income. Then you have to pay $1,100 a month for an existing mortgage, $100 a month for your auto insurance, $300 for other debts. This brings your total debt payments to $1,500.
Now, it is time to put these figures into the formula. In this example, your debt-to-income ratio will be ($1,500 divided by $5,000), and the answer will be 30%.
When thinking about your ratio, remember the lower the percentage, the better. One of the most effective ways to improve your chances of getting a loan is by lowering your DTI. It’s as simple as that!
What is the Maximum Debt-to-Income Ratio?
According to studies, borrowers with high DTI ratios often run into roadblocks and trouble making payments. Therefore, you have to ensure that your DTI must never exceed 43%, as this is the highest you can go and still get a qualified home mortgage.
Are There Any Exemptions?
There are some rare cases where small creditors will consider a high DTI ratio but still offer you a qualified mortgage, even when your debt-to-income ratio exceeds the 43% benchmark.
Large corporate lenders may also allow you to take out a loan if your DTI is higher than 43%. However, the lenders will have to demonstrate reasonable good-faith efforts as per the Consumer Financial Protection Bureau (CFPB) rules to justify your ability to repay the loan.
Tip to Improve Your Debt-to-Income Ratio
If you are DTI is higher than 43%, here are some tips to help you bring it down to secure a home mortgage or any other type of loan.
- You must increase the monthly repayment amount you make towards your debt. Extra payments will help lower your debt quickly.
- You must avoid taking out any more debts on top of existing debts.
- Do not make any large purchases, such as buying a car, furniture, or gadgets. Remember, you have to use less credit.
- As your debt goes down, you can recalculate your DTI ratio to determine if you are making progress.
Lowering your debt-to-income ratio will help give you the best chance of receiving a lower interest rate on any potential loans in the future. If this sounds like something you’d like to explore further, we can help assess your situation and find solutions that work for you.
PRMI – Wooster has been helping clients purchase homes since 1998 and is backed by one of the most established mortgage lenders in the county with a nationwide presence. We offer a variety of loan programs for the greater Wooster, Ohio area – including Canton and Medina, Ohio. Are you looking for a trusted lender? Contact us by phone at 866.888.7902 or email Matt Shanlian at mshanlian@primeres.com.
**Opinions expressed are solely my own and do not express the views of my employer.
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