Your debt-to-income ratio, or DTI, is a metric that lenders use to determine your ability to pay your monthly payments. It gauges how much of your gross monthly income goes toward debts like car loans, student loans, credit card payments, and your potential mortgage payment. Other living expenses like utilities, car insurance, groceries, internet, and cell phone payments are not included.
A low DTI ratio tells the lender that you have a healthy balance between debt and income and are more likely to be able to handle a mortgage payment. A high DTI ratio may indicate that your income does not support the debt you have, and you would not be able to add a mortgage payment to that debt.
To calculate your DTI, you add up all your monthly debt and then you divide it by your gross monthly income. Make sure to leave out those monthly living expenses like your phone bill and utilities. Your Loan Originator is a great resource to help you calculate and understand your DTI. They will walk you through the calculation, explain what it means, and answer any questions you have.
First thing’s first: don’t create even more debt. Stop spending on credit cards if you can, and refrain from taking out other loans. To get to a lower DTI, you’ll want to make sure you don’t increase your current debt.
If you can, pay off some debt or even make some extra payments to reduce your debt. This is a great way to improve your DTI. Even if you can’t eliminate debt completely, chipping away at it as much as possible can help.
Another option to improve your DTI is increasing your income. If you have more income to balance your monthly debts with, this can reflect positively in your DTI. Maybe it’s time you ask for a raise, try out for a promotion, or get a second job.
When it comes to getting a mortgage, there are several things that help determine whether you are approved. Your Debt-to-Income Ratio is a major factor that lenders will consider as they process your application. One of our experienced Loan Originators can help you calculate and understand your DTI and the mortgage process as they relate to your home financing goals. Be sure to contact us today to find out how we can help you get started.