Your debt-to-income ratio (DTI) is very important when applying for a mortgage, but the numbers are not set in stone.
For the best overview of your debt-to-income ratio and your mortgage application, speak with a lending professional today!
What is a Debt-to-Income Ratio?
Debt-to-income ratio compares how much money you owe each month in recurring payments to how much money you earn each month. To calculate your debt-to-income ratio, you divide your monthly debts by your monthly income, and get a percentage based on that.
For example, if you spend $1,650 a month across your mortgage, insurance, and any other bills and make $5,000 a month pre-tax, your debt-to-income ratio would be 33%.
Higher monthly debts with less monthly income will raise your debt-to-income ratio, while lower debts with higher income will lower it.
What Types of Debt are Included in DTI?
Any fixed monthly payment is factored into your debt-to-income ratio. This can include:
- Housing costs (rent or mortgage payments)
- Property taxes and homeowner’s insurance
- Car loan payments
- Student loan payments
- Child support/alimony
- Minimum credit card payment
Expenses that may vary from month to month are not included in your DTI, such as:
- Utilities (water, electricity, gas, etc.)
- Cable bills
- Internet bills
- Phone bills
- Grocery expenses
- Food, entertainment, or personal expenses
Why is Your Debt-to-Income Ratio so Important?
Similar to your credit score, your debt-to-income ratio serves as a gauge of where your money is going and how much money you have left over after paying your monthly bills.
It is especially important when applying for a mortgage, as the lender wants to see that you, as the borrower, will be financially stable and avoid any problems that may arise.
A low DTI shows that a person is able to manage their money effectively and shouldn’t have any issue if unexpected expenses appear over the course of a given month.
What is a Good Debt-to-Income Ratio?
Generally, a 35-45% debt-to-income ratio is the highest a borrower can have and still get qualified for a mortgage. However, there are options if your DTI is higher – ask your loan originator for details.
A DTI of 35% or lower is typically what lenders look for when considering a mortgage application, given that 28% or less of that debt is going towards the mortgage. Higher than 28%, it may be more difficult to get approved.
While these are general guidelines, they are not requirements; you may still qualify for a mortgage if you don’t meet these guidelines exactly! For more information, speak with one of our knowledgeable home loan experts.
