Understanding Your Debt-to-Income Ratio: What You Need to Know to Secure a Mortgage
When it comes to applying for a mortgage, your debt-to-income (DTI) ratio is one of the most important factors that lenders consider. This ratio compares your monthly debt obligations to your gross income, and it’s used to evaluate your ability to repay a loan. In this article, we’ll explain what your DTI ratio is, how it’s calculated, and what you need to know to secure a mortgage.
Get a Customized Rate Quote (Jun 1st, 2023)What is a Debt-to-Income Ratio?
Your DTI ratio is a simple calculation that compares the amount of money you owe each month to the amount of money you earn each month. To calculate your DTI ratio, add up all of your monthly debt obligations (including your mortgage payment, credit card payments, car loans, student loans, etc.) and divide that number by your gross monthly income.
For example, if your monthly debt obligations total $2,500 and your gross monthly income is $5,000, your DTI ratio would be 50%.
What is a Good Debt-to-Income Ratio for a Mortgage?
Most lenders prefer to see a DTI ratio of 43% or lower for a mortgage. This means that your monthly debt obligations should not exceed 43% of your gross monthly income. However, some lenders may approve a higher DTI ratio if you have a high credit score or a large down payment.
Get a Customized Rate Quote (Jun 1st, 2023)As a delegated lender, Fairway Mortgage can qualify borrowers with DTI ratios for the following loan programs.
● Conventional loans: 50%
● FHA loans: 50%
Get a Customized Rate Quote (Jun 1st, 2023)● VA loans: 41%
● USDA loans: 43%
A few important caveats, though.
Get a Customized Rate Quote (Jun 1st, 2023)How to Improve Your Debt-to-Income Ratio
If your DTI ratio is too high, there are a few things you can do to improve it and increase your chances of getting approved for a mortgage. Here are a few tips:
- Pay off some of your debt: The more debt you have, the higher your DTI ratio will be. Try to pay off some of your debt, especially high-interest credit card debt, to lower your ratio.
- Increase your income: The more money you make, the lower your DTI ratio will be. Consider taking on a part-time job or a side hustle to increase your income.
- Wait to apply for a mortgage: If your DTI ratio is too high and you can’t improve it quickly, it may be best to wait a few months or even a year to apply for a mortgage.
Conclusion
Your debt-to-income ratio is an important factor that lenders consider when you apply for a mortgage. A good DTI ratio is 43% or lower, but some lenders may approve a higher ratio if you have a high credit score or a large down payment. If your DTI ratio is too high, try to pay off some of your debt, increase your income, or wait to apply for a mortgage.
Understanding your DTI ratio and how to improve it can help you secure a mortgage and achieve your dream of homeownership. It’s important to be aware of your ratio and work on improving it before applying for a mortgage, so that you can increase your chances of being approved and achieve your financial goals.
apply online for a preapproval (Jun 1st, 2023)