Your debt-to-income ratio, or DTI for short, measures how much of your gross monthly income you spend on your debts. Calculating your DTI is simple — we add up what your monthly debt will be once you have your new home (such as student loans, car loans or lease, minimum credit card payments, and your future mortgage payment) and divide it by your gross monthly income (how much money you earn before taxes are taken out).
When calculating your DTI, we do not include your monthly living expenses, such as utilities, cell phone payments, car insurance, or groceries.
What’s a good DTI?
In terms of getting a mortgage, each loan program requires a different DTI. Generally speaking, 35%-45% is a good range to aim for — for sure less than 50%.
Because there are other expenses not calculated in the DTI ratio (like groceries, utilities, spending cash, etc.), it’s important to keep your DTI less than 50%, that way you have enough disposable income for your variable expenses and to put aside in savings.
How to Lower your DTI
Reduce the amount of debt you owe. The first step in reducing your debt is to avoid creating new debt, so keep an eye on that. It can also be helpful to put a little extra toward your debts each month to help eliminate them faster. You’d be surprised how quickly it can snowball, in a good way!
Increase your income. In addition to lowering your debt, you can change your DTI by increasing your income. You can boost your income by getting a part-time job, working a few extra hours at your current job, or even negotiating a higher salary. You can also turn your hobbies into a side hustle, like selling goods on Etsy, driving for Uber, offering organization or event planning assistance to friends and family, signing up to be a dog walker — the possibilities are endless.
Refinance existing debt. If you’re not able to pay your student loans ahead of schedule, you may consider refinancing to restructure your student loan debt. This would be a good option if you’re able to qualify for a lower interest rate. Remember, lower monthly payments positively affect your DTI.
Consolidating debt or tweaking finances to improve DTI is a good option if you have a little time before you begin shopping for a home. Opening and closing accounts can have a negative impact on your credit score. So, if you’re looking to purchase a home sooner rather than later, it’s best to wait until after you close on your home to make any major finance modifications. Consider taking other steps to improve your DTI if this is the case.
Cut back on spending. By reducing your day-to-day expenses, you will prevent adding to your debt, while freeing up money to put toward paying it down. That’s a win-win!
Contact a mortgage professional in your area to ensure you’re making the right decisions to lower your DTI ratio. Your mortgage lender will be able to give you a better idea of where your DTI ratio should be if you’re considering purchasing a home, and additional things you can do to get there if you’re not quite already.