Most people hate math. Especially ratios. So, when you hear the term “debt-to-income ratio” you probably don’t get excited. So, let us put it a different way: Do you want to be able to buy a house? If the answer is “yes” then you need to start understanding what a debt-to-income ratio is and what it means to you as a homebuyer.

What Is A Debt-to-Income Ratio?

A debt-to-income ratio, frequently referred to as DTI for short, is a percentage. You can calculate it by taking the total amount of monthly payments you’re required to pay on your debts and divide that number by your monthly pre-tax income. For example, if your car payment, student loan payment, and credit card payments add up to $600 per month, and your income is $3000 per month, then your DTI ratio is 20%.

Why Is Your DTI Important in the Mortgage Approval Process?

Before lenders approve your loan, they want assurance that you will be able to pay it back on time and in full. By looking at your DTI ratio, they can gauge the likelihood of you being able to afford the monthly mortgage payments. A debt-to-income ratio is only one item of many that lenders review to qualify you for a mortgage loan, but it’s one of the most important. If yours is out of line it can knock you out of getting approved.

So, What Percentage Do Lenders Want to See?

Like golf, the lower the number, the better. While there’s no single magic number, many loan programs can work with a DTI ratio of 43% or below. This number can vary slightly depending on the type of mortgage you’re seeking. Remember, lenders see a DTI ratio of higher than 43% as riskier, because it signals your income may not be able to cover living expenses and your monthly PITI payments (PITI payments are the total of your principal, interest, insurance, and taxes of your mortgage payment). Bottom line, a lower DTI equals less risk for lenders.

Is There A Way to Lower My DTI Prior to Speaking with A Loan Officer? 

Yes. If you run the calculation and your DTI ratio is too high, paying down your monthly debts will lower the number. Tightening up your budget so you can double or triple up on credit card payments, paying off your car, and avoiding taking on new debt are all ways to lower your DTI. It won’t change overnight, but you can make great progress in a few months if you stick with it.

We aren’t trying to turn you into a math lover. But hopefully you now understand how your debt-to-income ratio weighs heavily into securing your mortgage loan. If you’re thinking about purchasing a home, take the time to calculate your debt payments and figure out your DTI ratio. If it’s too high, work on it proactively so you can qualify for the mortgage loan you want. Being educated and informed is one of the most important aspects  of your homebuying journey!

Do you have questions about your DTI ratio or about mortgage loans in general? Contact us today to speak with one of our professional loan officers.