Did you know that you need a good DTI of 36% to get approved for a mortgage? This ratio is used to determine your eligibility for a mortgage, and lenders evaluate your DTI when making a decision on your loan. Some mortgage approval programs, and some loan programs, have different DTI requirements.
But what exactly is DTI and what is it for?
What Is Debt-To-Income Ratio
Your credit score is not the only factor that lenders use to determine whether you are a good risk for a mortgage loan. There are other factors that can make your loan application a denial or a delay. Debt-to-income ratio is one of them.
Your debt-to-income ratio (D/I ratio) is the percentage of your income that you are spending on your monthly debts including your mortgage payment. If you have other debts besides your mortgage, then this number is the sum of all your monthly debts.
The DTI encourages borrowers to live within their means, and has become a more common lending requirement in the United States. As the cost of living in the US has increased significantly over the past few years, more and more of a person’s income is being spent on rent and other expenses, which makes it difficult for them to save money in the long run.
How DTI Is Calculated
In order to determine your eligibility for a mortgage loan, a lender will evaluate your DTI.
Sometimes called DTI or LTV ratio, your debt-to-income ratio is calculated by dividing your monthly debts by your monthly income, gross or pre tax.
A lender will calculate your debt-to-income ratio by adding all of your monthly debts, including payments for loans and credit cards, to your monthly income. Then, they will divide that number by your monthly income. The resulting number is the percentage of your income that is going towards debt. For example, if your monthly income is $5,000 and your monthly debt payments are $3,000, your DTI ratio is 60%. If you have more than one mortgage, the lender will average the debt-to-income ratios across all of the mortgages.
You need a good DTI to qualify for a mortgage. Your DTI will be checked to determine your ability to pay your mortgage. If your DTI is high, you will be asked to lower your payments to a certain percent of your income.
For instance, you need a good DTI of 36% for your mortgage to be approved. However, most lenders are looking for 36% and below.
There are times that DTI leaves out other monthly expenses such as health insurance, food, transportation, utility bills. This means that the lender will not consider these as expenses and will approve your mortgage right away.
A rule of thumb is that the higher your DTI, the higher the risk of default on your loan. So make sure that you aim for a lower DTI so you can qualify for the best mortgage options and ultimately buy your dream house.
How to Lower Your DTI
If you want a lower DTI, you can consider the following:
- Avoid taking more debts.
- Build up your savings account.
- Try to negotiate better terms from your creditors.
- Pay off your debts (school loan, credit card, etc.) before applying for a mortgage.
- Lower your monthly expenses and avoid big purchases on credit before buying your dream home
Make sure that you check your DTI before applying for any mortgage loan. If you have a higher DTI, you will have to run the risk of not qualifying for a mortgage loan. By lowering your DTI, you can improve your chances of qualifying for a mortgage.
Clayson Mortgage is a trusted mortgage company in Utah that specializes in residential and real estate mortgage loans. We have been helping people finance their homes and real estate properties. Let us be your trusted partner in your efforts to buy your dream home! Contact us today to get started!