In this 'What to Know' series, we’ll cover debt-to-income ratio (DTI) and why your DTI is important when preparing to buy a home.
Whether you’re planning to buy a home or flirting with the idea, it’s important to stay educated so you can be fully prepared when the time comes.
What is your DTI?
Your Debt-to-Income Ratio (DTI) compares how much debt you pay monthly to how much money you earn monthly, and it’s expressed as a percentage. Your monthly debt payments include anything from rent to credit card payments to loans, and more.
Why is DTI important?
Your DTI is a key indicator of your overall financial health, much like your credit score. Lenders use your DTI as one of the determinants of loan approval because it helps to answer the key question in lending: how likely is this borrower to repay the loan?
How is DTI calculated?
It is calculated by dividing your monthly debt payments by your gross monthly income (income before taxes), then multiplying by 100 to convert it into a percentage.
To add up your monthly payments, consider your fixed monthly bills. This includes rent/home payment, loans (student, car, personal, etc.), child support/alimony, and your minimum credit card payments.
For example, the Kim Family has a Gross Monthly Income of $6,000 and has a credit card with a minimum payment of $50 and a car with a payment of $450. They are interested in a home with a payment of $1,500 (which includes taxes and insurance).
The DTI for the Kim Family would be calculated as follows:
(Calculated monthly debt: $50 + $450 + $1500 / Gross monthly income: $6000) x 100
The Kim Family’s DTI is 33.3%.
Most loan options require a DTI of less than 50%, and in some instances, we can go as high as 56.99%. However, remember that to qualify for a mortgage, lenders look at more than just your DTI. It’s important to prepare your full profile, which includes a down payment, housing expense ratio, and credit score.
By educating yourself on the important things to consider when thinking of buying a home, you’re now one step closer to homeownership! Whether now’s the time or not, we have available homes for purchase or lease! Contact us today to get in touch with one of our agents.