Debt-to-income (DTI) ratio is a one of several very important factors that lenders use to determine if you qualify for a mortgage loan. It helps understand how much of your monthly income is used to pay debts. Here are three things to know about DTI ratios when qualifying for a home mortgage:
First, what is DTI? It is simply your total monthly debts divided by your gross monthly income (income before taxes and deductions). This ratio helps lenders determine your ability to manage your current debts, the ability for you to pay the additional monthly mortgage payments you will be taking on, and to calculate how much money you qualify to borrow. Different loan types, and even different lenders, allow for differing percentages of DTI limits and lending criteria.
What debts are used when calculating DTI? Your current mortgage or rent pymt, student loans, personal loans, car loan or lease, credit card pymts, and any alimony or child support pymts. What is NOT used in the calculation are utilities, car insurance, cable and phone bills, health insurance, groceries and entertainment expenditures.
What is considered a good DTI? As a general rule, 35% or less DTI is favorable, 36% to 49% is adequate or could use improvement, and 50% + is considered high. BUT remember that the different loan packages available have varying acceptable DTIs (when combined with other factors), so don't be discouraged if you fall outside of what is considered favorable. It is important to connect with a local mortgage broker to discuss what options are available to you, and if improvements are needed, what steps to take to meet those improvement goals.
DTI isn't the only factor in the qualification process, other factors include credit history, credit score, and how much available credit you currently have leveraged (how much of your available credit have you borrowed).
But once you've qualified for a loan, all of the above factors have been considered, and if there is a significant change in one of them, your qualification status can change. If it is a negative change, such as an increase in your debt-to-income ratio - because of a new credit line being opened and used (car or furniture purchase, for instance) - you may qualify for a much lower purchase price and no longer able to afford the type of home that would support your current standard of living. And if you happen to have your dream home under contract, you could lose the house because you no longer qualify for the loan. Yikes! A costly mistake.
Education is such a large part of what I do with my clients, and my industry partners in the mortgage business do as well. If you are in the market to buy a home and are just sitting down to talk with and work with professionals to get started - keep those ears open and stick to the plan, I promise you won’t regret it!
Need a referral to mortgage professional in my market? I got you, I work with the best! Reach out and I'll get you connected! The sooner you start the better, get a hold on your pre-qualification status and start looking with confidence!
Wendy Lane-Borland | WA Real Estate Broker
@thewendyhomegroup on IG | FB | TT
The Wendy Home Group
Skyline Properties, Inc