What Is DTI and How It Affects You

Debt to Income Ratio

DTI stands for debt-to-income ratio, and it is used by mortgage lenders to determine how capable you are of paying your mortgage every month. DTI compares an individual’s monthly debt to their gross monthly income. To calculate your DTI, your lender will divide your gross recurring monthly debt to your total monthly income, and it is calculated as a percentage. Ideally lenders want a low DTI, around 43%, though that’s not a hard and fast rule. Some lenders will allow a DTI ratio up to 50%, depending on the borrower’s credit score.

A low DTI shows a good balance between your debt and your income. Conversely, a high DTI is a sign that one may have too much debt for their income to handle. Most lenders prefer to see a low DTI of around 43% with about 28% of that debt committed to paying a mortgage.  Though the number does vary from lender to lender, generally the lower your DTI is the better the chance of the borrower getting a loan.

However, there are two ways to reduce your DTI. The more difficult way is to increase your gross monthly income, the other is lowering your monthly debt by paying off a chunk of it. So, if you have a monthly recurring debt of about $2,000 and a gross monthly income of $8,000 your DTI would be $2,000÷$8,000 = .25 or 25%, a ratio that a lender would love to see. Similarly, if we were to increase that monthly expense to $3,000 your debt to income ratio would rise to 37.5%, not as good as 25% but lenders will still typically approve you for a mortgage loan.

Now if your DTI is higher than 43%, that doesn’t disqualify you from getting mortgage.  Some lenders will allow you to borrow in good faith if you give good cause that you’ll be able to pay it back. There are also other options for mortgage loans that don’t conform to industry standards called non-prime loans. You don’t need to have a specific DTI to qualify for these because they don’t conform to the Freddie Mac and Fannie Mae Standards. Typically, these loans have a higher interest rate than other conforming loans such as conventional and FHA loans. So, if you’re in a hurry to get a mortgage those options are out there. But the best thing to do is to pay down your debt so that you can get a mortgage at a low, much more affordable rate, which in the long run could save you tens of thousands of dollars.

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