Getting a home loan can seem complicated due to the many moving parts of the process. However, understanding expectations relieves any unnecessary stress, and one of those important expectations is knowing your debt-to-income (DTI) ratio.
Your DTI ratio compares your monthly debt payments to your monthly gross income. This ratio helps lenders assess your ability to manage monthly payments and repay borrowed money responsibly. To calculate your DTI ratio, add up all your monthly debt payments, including car loans, credit card minimum payments, student loans, and any other debts that require monthly payments. It’s important to note that utilities, cable bills, and phone bills are not included in your DTI calculation, as these expenses are considered discretionary and can vary from month to month.
Investors typically prefer to see a lower DTI ratio, indicating that a smaller portion of your income is dedicated to debt repayment, which suggests better financial health and a higher likelihood of loan approval. However, some mortgage programs may allow for slightly higher DTI ratios depending on other factors such as credit score, down payment amount, and overall financial stability. It’s essential to aim for a DTI ratio that fits within the guidelines of the mortgage program you’re applying for and your personal budget to improve your chances of securing financing at favorable terms.
While increasing your income can help lower your DTI ratio, it’s important to note that investors generally require a history of stable income from any additional sources. This means that getting a new job or starting a side gig right before applying for a mortgage may not immediately impact your DTI ratio positively. Instead, focus on managing existing debts responsibly and avoiding new debt commitments in the months leading up to your mortgage application.
By understanding and actively managing your DTI ratio, you can position yourself more favorably during the mortgage approval process and increase your chances of achieving your homeownership goals. Contact us or apply today for more details!
