DTI ratio, or debt-to-income ratio, is a percentage used by lenders to determine your eligibility for a qualified mortgage. Also known as the “ability-to-repay rule,” DTI and other factors such as your credit score is “the reasonable and good faith determination most mortgage lenders are required to make that you can pay back the loan.
While there are exceptions, lenders may not lend to you if more than 50% of your income goes to debt payments. To improve that number, follow these four tips:
Know How To Calculate DTI Ratio
First, you must be able to calculate your DTI ratio. Knowing your DTI ratio will help you figure out if it needs to be improved before applying for a mortgage. Follow this calculation:
Monthly debt payment / Gross monthly income = Debt-to-income ratio
Your gross monthly income is the money you have earned before taxes, and other deductions are taken out. When calculating DTI, do not include living expenses such as utilities, car insurance, and groceries.
Budget Money Realistically
Realistically budgeting your money will prevent monthly costs from eating up your income, leaving you short. A good homeowner’s budget will take into account:
- Car insurance
- Homeowner expenses
- Monthly debts
Don’t Take On More Debt Before Purchasing A Home
Whether you are in the process of looking for a home or already in the purchasing stages, avoid taking on more debt. That means no large purchases like cars or even furniture. Taking on more debt before closing increases your debt-to-income ratio, making lenders wary of lending to you.
Responsibly Pay Off Debts
Paying off all debts responsibly will help lower your debt-to-income ratio and make you more attractive to lenders. Making the minimum payment each month and paying a bit more each month is a great way to lower your DTI and pay off debt faster. Just remember only to pay extra when you can afford to do so! You do not want to go overboard and not meet other monthly obligations like groceries and bills.
If possible, consolidate your debts, so you only have one monthly payment. This is especially helpful if you have student loans.