Why Your Debt-to-Income Ratio Matters When Taking Out a Mortgage?

Aside from your credit score and credit history, mortgage lenders will also determine your “ability to repay” through your debt-to-income ratio or DTI ratio. It’s the part of your monthly gross income that you use to repay monthly debts. As someone planning to take out a mortgage, you need to understand DTI to figure out if you need to improve it to increase your chances of getting a lender approval.

Your DTI ratio in a nutshell   

Most mortgage lenders generally will approve your application if you have a low DTI ratio because it simply means that you’re not spending too much of your income on repaying your monthly debts. The maximum DTI ratio that many mortgage lenders consider for a Qualified Mortgage is no more than 43 percent. If your DTI ratio exceeds the currently acceptable maximum limit, lenders will likely turn down your application or charge you a higher interest rate because they consider you as a higher risk. The ideal DTI ratio that most lenders consider when applying for a conventional mortgage or government-backed mortgage is no greater than 28 percent.

Although it’s possible for borrowers with a high DTI ratio to get a mortgage, lenders must follow the rules set by the Consumer Financial Protection Bureau in determining that a borrower can repay the loan he or she will take.

If you have a high DTI, it could also affect your credit score especially if you’re starting to miss your monthly dues and you consider taking another credit.

It’s easy to know your DTI ratio

To determine your DTI ratio, all you need to do is to divide your overall monthly debt payments by your monthly income before taxes and deductions. So, if you’re earning $3,000 in monthly gross income and you’re paying $1,200 in monthly debts, you have a 40 percent ($1,200 is 40% of $3,000) DTI ratio. As someone with a 40 percent DTI ratio, you may want to reduce your DTI before you shop for a mortgage so you can get more lender approvals from lenders with favorable interest rates.   

It’s also easy to improve DTI

You’re in a good position shopping for a mortgage if you have a very low DTI ratio. Once you review your overall expenses and determine your DTI ratio, there are several ways you can lower your DTI ratio. The two most important things you need to do are the following: Increase your gross income and pay off your revolving debts, keeping it to a minimum. You may want to look for a new job or another part-time job if your current employer won’t give you a salary increase or doesn’t allow you to work overtime. As much as possible, you need to pay most of your monthly debts and refrain from taking new debts. Some people consolidate their debts so they can easily track their repayments.

Your DTI can make or break your mortgage application

Lenders determine your DTI ratio to know if you have enough financial resources to comfortably repay your monthly mortgage on top of your revolving debts. Lenders could offer you favorable mortgage interest rates if you have a low DTI ratio. As someone planning to take out a mortgage, there are ways you can do to improve your DTI ratio.