What is a debt-to-income ratio?
A debt-to-income ratio (DTI) is a measure of how much of your monthly income is going towards debt payments. Lenders use DTI to assess your ability to afford a mortgage. A higher DTI means that you have less money available to make mortgage payments, which can make it more difficult to qualify for a loan or get a lower interest rate.
How is a DTI calculated?
To calculate your DTI, add up all of your monthly debt payments, including your mortgage payment, car payments, student loans, credit card payments, and any other debts. Then, divide that number by your monthly gross income. For example, if your monthly debt payments total $2,000 and your monthly gross income is $5,000, your DTI would be 40%.
What is a good DTI for a mortgage?
A good DTI for a mortgage is generally considered to be below 36%. However, some lenders may have higher or lower DTI requirements. If you have a DTI above 36%, you may still be able to qualify for a mortgage, but you may have to pay a higher interest rate.
How can I lower my DTI?
There are a few things you can do to lower your DTI, including:
- Pay down debt. The more debt you have, the higher your DTI will be. Make extra payments on your debt, or consider consolidating your debt into a lower-interest loan.
- Increase your income. If you can increase your income, you can afford to make higher mortgage payments. Consider getting a part-time job, starting a side hustle, or asking for a raise at work.
- Refinance your mortgage. If you have a high-interest mortgage, you may be able to refinance into a lower-interest loan. This can help to lower your monthly payments and your DTI.
How does a DTI affect home financing?
Your DTI is an important factor in determining whether you will be approved for a mortgage and what interest rate you will pay. Lenders use DTI to assess your risk of defaulting on the loan. The higher your DTI, the higher your risk of defaulting, and the higher the interest rate you will pay.
If you are considering buying a home, it is important to get your DTI in good shape. You can do this by paying down debt, increasing your income, or refinancing your mortgage.