When lenders look at your loan application, whether you’re buying a house for sale in Briarwood, a home for sale in Grassland Estates, or a home for sale in Greathouse, they want to know what your debt-to-income ratio is. Lenders assess your ability to repay the loan on a long-term basis, so they look at your ability to pay the loans you already owe on right now.
What is Debt-to-Income Ratio?
Your debt-to-income ratio, or DTI, is your current amount of debt payments that go out each month versus your current income.
How to Find Your DTI
Add all your monthly debt payments and divide that sum by your gross monthly income to find your debt-to-income ratio.
Your monthly debt payments include:
- Mortgage or rent payments
- Credit card payments
- Auto loans
- Personal loans
- Student loans
Your monthly debt payments do not include:
- Other expenses
DTI Calculation Example
Let’s say your monthly debts total $2,000. If your monthly income is $5,000 (before taxes), divide $2,000 by $5,000 to get 0.4, or 40 percent. Your monthly debt-to-income ratio is 40 percent.
What’s a Good DTI?
Most lenders prefer borrowers to have a DTI of 35 percent or lower, but typically, up to 49 percent won’t preclude you from getting a loan. However, a DTI of 50 percent or higher will most likely affect your ability to get a loan.
If your DTI is above 43 percent, you may not be able to get a “qualified mortgage,” which features protections from things such as balloon payments, interest-only repayment periods and negative amortization.
The best way to improve your DTI is to pay down your debts.
Are You Buying a Home in Midland?
Call our team of Midland real estate agents at 432-698-0411 today.
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