When buying a mortgage, your debt-to-income ratio determines how much you will be approved for.

The maximum DTI ratio for most loans is 43%, and in some cases, lenders will allow up to 50%.

 Current Mortgage Rates (Novermber 2020) Loan Term Interest rate APR 30-year fixed-rate mortgage 3.15% 3.38% 15-year fixed-rate mortgage 2.91% 3.06% 5/1 adjustable-rate mortgage 3.05% 3.25%

## What Is the Debt-to-Income Ratio?

Your debt-to-income ratio (DTI ratio) is the amount of your income that goes towards your monthly debt obligations. There are two types of DTI ratios, your

Front-End DTI Ratio – Your front-end ratio is the amount of your income that does towards your debt before factoring in your monthly mortgage payments. Ideally, your front end ratio should not exceed 26%.

Back-End DTI Ratio – The back-end DTI ratio is the amount of your income that goes towards your monthly debt obligations, including your estimated mortgage payment. The maximum back-end DTI ratio is 43%. In some cases, a DTI ratio as high as 50% may be accepted.

## What’s the Ideal DTI ratio for a Mortgage

36% is the ideal back-end DTI ratio for a mortgage loan.

Ideally, the maximum debt-to-income ratio lenders prefer to see is 36%. However, 43% is the typical maximum DTI ratio accepted, and in some cases, 50%. But 36% is preferred. It ensures that you have enough money each month to cover any unanticipated expenses.

## How to Calculate Your Debt-to-Income Ratio

• Take your total monthly debt payments, including all loans and credit cards.
• Multiply by 100 to get your debt-to-income ratio.

For example, if your make \$60,000 per year, your gross income is \$5,000 per month.

Find out your total monthly payments on your credit cards, auto loans, and any other loan with set monthly installment payment.

• Auto loan – \$500
• Credit card minimum payments – \$300
• Personal loan – \$200

Your total monthly debt obligations are \$1,000, now divide it by your gross income before taxes (\$5,000) 20% is your front-end DTI ratio.

To find your back-end ratio, your lender will give you your estimated mortgage payment. If the maximum debt-to-income ratio is 43%, then you’re limited to a monthly mortgage payment of \$1,150.

See How Much You Qualify for

## Working with a High DTI Ratio

The maximum debt-to-income ratio lenders accept for a mortgage loan is 43%. In some cases, they can accept ratios as high as 50% if you have compensating factors such as great credit.

#### Compensating Factors

Things such as a high credit score or being with your current employer for many years strengthen your loan application allowing lenders to increase the DTI requirement.

 Compensating Factors * Limited payment shock * 5+ years with the same employer or in the same industry * High income * Large amount in savings * Good credit * 20% down payment * Low debt-to-income ratio below 36% * Residual Income * Limited debt (credit cards, auto loan, etc.)

The interest rate you receive on a mortgage is directly tied to your credit score. The higher your credit score is, the lower your mortgage rate will be. You can reduce your DTI ratio by lowering the rate on your loan.

Steps to Improve Your Credit Score

Compare Loan Estimates

The interest rate and closing costs lenders charge will vary widely from lender to lender. It’s important that you compare loan estimates from multiple lenders to ensure you’re getting the most competitive rates. Everything can be negotiated, and that includes your loan terms. use loan estimates you get from other lenders to help you negotiate a better deal on your mortgage.

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