Ready to purchase your dream home or refinance your mortgage, but you’re not sure about your debt-to-income ratio? We’ve got you covered in our Debt-To-Income Ratio Explained guide.
What Is Debt-to-Income Ratio?
When getting approved for a mortgage, one of the most important mortgage ratios you’ll need to learn to calculate for yourself is your debt-to-income ratio (DTI).
The debt-to-income ratio is a measurement of your gross monthly income (before taxes) when compared to the amount of outstanding debts you need to make a payment on each month. It’s expressed as a percentage.
For example, if your gross monthly income is $3,000 and you have a car payment of $500 and a student loan payment of $500, this would make your DTI 33% ($1,000 divided by $3,000).
Where Should My DTI Be?
Now that you’ve seen this debt ratio explained, you’re probably wondering what type of percentages mortgage lenders are looking for when approving home loans.
In general, lenders look for borrowers with a DTI of 45% or less. This means to be approved for a mortgage, your monthly bills should be less than 45% of your income. You can be approved with a higher DTI in some cases, reach out to learn more.
How Do I Calculate My Debt-to-Income Ratio?
It’s easy to calculate your debt-to-income ratio using this formula:
- DTI = Total Monthly Debts divided by Gross Monthly Income
- Multiply the result by 100
- This will give you your DTI expressed as a percentage
When you’re totaling up your monthly debts, be sure to include the following items:
- Car Loans
- Credit Card Payments
- Student Loans
- Any Other Outstanding Loans
Do NOT include the following items in your monthly debt total:
- Utilities (i.e., electricity, water, gas)
- Cable bill
- Cell phone bill
- Car insurance
How Can I Lower My DTI?
There are a few things you can do to help lower your DTI and increase your chances of qualifying:
- Pay off one of your loans
- Refinance a loan to lower your monthly payment
- Increase your income
We Can Help You With Options
Don’t be disheartened if you think your current debt-to-income ratio won’t let you purchase a home. Above are some of the ways to improve your DTI, and we’re happy to help you find solutions. Contact us today!