On the list of things you don’t want to do when taking on a mortgage, missing payments over and over again should be pretty high — like, the highest.
So don’t be surprised when your mortgage lender wants to know what other debts you’re paying before lending you money.
Along with looking at your credit report and loan-to-value ratio (remember that?), they use a metric called the DTI, or debt-to-income ratio, to evaluate your risk. It’s a measure of just how much of your income is devoted to paying off debt.
The general rule of thumb is that you want a fairly low DTI. But if yours is high, fret not. There may be ways you can reduce the ratio and still get the home of your dreams. We’ll tell you how:
So, tell me already
A DTI ratio tells lenders how reasonable it would be to give you a mortgage as you manage other financial obligations, says Tracy Wiese, a Movement operations leader.
Those obligations include your proposed monthly mortgage payments and any student loans, car payments, credit cards and other recurring debts or revolving lines of credit attached to your name.
How is it calculated?
Are you shocked that math is involved? At least it’s easy math.
Just add up your monthly debt payments (including your expected mortgage payment) and divide it by your gross monthly income. The result is your DTI, which is expressed as a percentage.
(A little FYI: Gross wages are your before-tax earnings, not the actual cash money that appears in your bank account each pay period).
What’s a good DTI?
That’s a loaded question. Different lenders look at it…differently, but most would agree that a low DTI makes for a good DTI.
Why? It means you have the bandwidth to borrow money with the assurance that you can still repay your loan.
Your next question: What’s considered a low DTI? Our answer: It depends on what kind of loan you’re seeking. Most programs require total debt-to-income to fall below 43 percent — or even lower. Talk to a mortgage professional to assess your situation. Just know that a DTI over the maximum threshold can be a roadblock to your home loan.
Can I lower my DTI if it’s too high?
You sure can.
Start by paying off those pesky little loans you may have taken on when you were in a pinch. Then, consider closing some of those unused credit card accounts you opened post-grad. Eliminating lingering debt will bring down your ratio.
Boosting your income will also improve your ratio, so if you’re overdue for a raise perhaps it’s time to schedule a one-on-one with your boss.
You want to know more
And you should. So give one of our loan officers a call and they’ll help answer many of your questions.