You probably know that your credit score affects the home mortgage rates you are eligible for. But did you know about your Debt-to-Income (DTI) ratio? The Debt to Income Ratio helps lenders to decide whether you can take on another monthly payment. It can play a role in loans of all types, from personal loans and student loans to fixed and adjustable-rate home mortgages.
What bills do lenders usually use to determine your DTI ratio?
Some lenders use their own formula to calculate a DTI ratio, but most DTI calculations add up the following payments:
- Rent or house payment
- Alimony or child support
- Student, car loan, and credit card monthly payments
- Other debt payments
Most DTI ratio calculations don’t include other bills you have to pay, like food, utilities, transportation, and taxes.
How do you calculate your DTI based on your income and payments?
Add up your DTI qualifying payments, including your rent or house payment, alimony, child support, and other loan and debt payments. Divide this total by your monthly gross income, which is your income before taxes. The number you’ll come up with will be your DTI ratio.
If your DTI is 35% or lower, you’ve got a good DTI ratio and lenders will view your applications favorably. Moving into a higher range of 36% to 49% DTI, your debt is running the risk of being too much. Lenders will probably ask for additional criteria to qualify you for a home loan. You can also work to reduce your DTI if it’s over 35%.
At 50% DTI or higher, you are paying half of your income toward the debt that you owe. This high amount leaves you vulnerable financially. You can still get a home loan with a 50% DTI ratio under specific circumstances. Some lenders can be flexible with DTI ratios. This is another reason to work with an experienced mortgage specialist who has worked with a number of mortgage lenders. They can help you understand your DTI and what loans you can qualify for.