First Time Home Buyer: What is Debt to Income Ratio (DTI) When Applying for Mortgage?
A debt to income ratio is one way lenders measure your ability to manage the payments you make every month to repay the money you have borrowed. Lenders use your DTI ratio to evaluate your current debt load and to see how much you can responsibly afford to borrow. Less debt equals more borrowing power.
Lenders look at this ratio when they are trying to decide whether to lend you money or extend credit. A low DTI shows you have a good balance between debt and income.
How does debt-to-income ratio is calculated?
Your DTI is expressed as a percentage and is your total “minimum” monthly debt divided by your gross monthly income. To calculate your debt-to-income ratio, you add up all your monthly debt obligation payments and divide them by your gross monthly income. Your gross monthly income is generally the amount of money you have earned before your taxes and other deductions are taken out.
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For example, if you pay $1000 a month for your mortgage and another $200 a month for an auto loan and $400 a month for the rest of your debts, your monthly debt payments are $1600. ($1000 + $200 + $400 = $1,600.) If your gross monthly income is $5000, then your debt-to-income ratio is 32 percent. ($1600 is 32% of $5000.)
What is a good debt-to-income ratio when buying a house?
Evidence from studies of mortgage loans suggest that borrowers with a higher debt-to-income ratio are more likely to run into trouble making monthly payments. The 43 percent debt-to-income ratio is important because, in most cases, that is the highest ratio a borrower can have and still get a Qualified Mortgage.
Generally you’ll want to keep it below 36, but the lower it is, the greater the chance you will be able to get the loans or credit you seek.
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