Understanding Debt-to-Income Ratio

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When buying a house, mortgage lenders will deep dive into your financial history to make sure you can afford the property. One percentage they’ll calculate is your debt-to-income ratio (DTI), which they’ll then use to predict your ability to manage monthly mortgage payments.

Here’s what you need to know about debt-to-income ratio, including how it affects getting a mortgage, what’s considered a good ratio, how to calculate it, and ways to lower your ratio and improve your chances of getting a mortgage.

What is Debt-to-Income (DTI) Ratio?

Your debt-to-income ratio is a percentage that compares your monthly debt payments to your gross monthly income.

When your DTI ratio is lower, it means you’re less of a risk for lenders. A lower DTI indicates that you have more money left over each month after paying your bills. But if your DTI ratio is high, it means you’re using a big chunk of your income to pay off debts. This makes you a riskier borrower because you might struggle to make your mortgage payments on time.

What Factors Affect Your Debt-to-Income (DTI) Ratio?

Several factors make up your DTI ratio.

Lenders factor in all your monthly debt payments when calculating your DTI ratio. This includes minimum credit card payments, student loan payments, car loan payments, alimony, child support and your projected housing costs (mortgage payment, property taxes, homeowner’s insurance).

For this reason, your lender will review your bank statements and credit report during the loan approval process to get information about these figures.

Keep in mind, though, that certain monthly payments like utilities, insurance premiums and other everyday living expenses are typically excluded from DTI calculations.

How to Calculate Your Debt-to-Income (DTI) Ratio?

Calculating your DTI is a straightforward process.

First, add up all your monthly debt payments (mortgage, car loans, credit card bills, student loans and any other recurring debts). Next, divide this total by your gross monthly income (your income before taxes and other deductions), and then multiply by 100 to get your DTI ratio.

DTI (%) = (Total Monthly Debt Payments / Gross Monthly Income) x 100

How to Lower Your Debt-to-Income (DTI) Ratio?

Lowering your DTI ratio can free up money in your budget and increase your chances of qualifying for a mortgage with a favorable rate.

Here are a few strategies to reduce your ratio:

  • Pay off existing debt (or pay down): Start by facing your balances head-on and understanding what you owe. Focus on paying more than the minimum each month—especially on high-interest credit cards—to make a dent in your debt faster. Pay with cash to avoid adding more debt and consider using the snowball method and tackle smaller balances first for quick wins.
  • Increase your income: Look for opportunities to boost your income like taking on a second job, freelancing or seeking higher paying opportunities. Increasing your income helps offset existing debts and lowers your DTI ratio.
  • Don’t take on new debt: This includes financing a car or making large purchases on credit and carrying the balance from month-to-month. New debt can increase your DTI ratio, which can reduce purchasing power and make it harder to qualify for a mortgage.

Knowing your debt-to-income ratio is key when buying a home. Lowering this ratio improves your chances of getting a mortgage with favorable terms, and it can also help you qualify for a bigger mortgage.

Ready to take the leap into homeownership? If so, reach out to FirstBank and speak with our local mortgage experts. Contact us today and start your path to owning a home.

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