When was the last time you thought, “I wonder what my debt-to-income ratio is”?
Most people don’t give DTI a second thought until it’s time to buy a house. So, if you’re in the market to buy, you’re definitely going to want to read this.
First of all – What is DTI?
Very simply put, your Debt-to-Income Ratio (DTI) is calculated by dividing your monthly debts by your pre-taxed income, expressed in the form of a percentage.
For example:
Let’s say your gross monthly income is $5,500.
Then let’s say your combined monthly obligations total $2,000. (This includes your rent or mortgage, car payment, student loan payment, credit card payments, and any other installment payment you make each month.)
You’ll do some simple math:
2,000 ÷ 5,500 = 0.36 or 36%
Your DTI would be 36%, which happens to be the ideal ratio, so way to go!
How does DTI affect the mortgage process?
DTI is a safeguard. It’s there to ensure that you don’t over-extend yourself as a borrower on a monthly payment for your mortgage. A higher DTI could mean you’ll pay more in interest, or you may be denied a loan. The goal is to be at or below that ideal 36%. If your DTI is on the high side, don’t worry. We can give you some pointers on how to lower it.
How can I improve my DTI?
You want to make sure you have the lowest possible debt to ensure that you are able to qualify for the maximum amount. So, take all of your debts and look at the minimum monthly payments required for each one. When you’re working on paying down debt, it’s a good idea to start by paying off the lowest debt with the highest monthly minimum payment, and so on.
Also, since DTIs don’t take into account expenses such as food, health insurance, utilities, gas and entertainment, you’ll want to budget beyond what your DTI labels as “affordable” for you, which is why aiming below the 36% target is ideal.
If you have any questions or simply want a better idea of your financial picture, visit https://www.homespiremortgage.com/loan-officer-search/ to find a Homespire Mortgage Loan Officer in your area. We’ll crunch the numbers and help you understand your DTI and give you some tips to get your finances into home buying shape.