What Debt-to-Income Ratio Will Affect your Mortgage?
Buying a home or refinancing an existing loan requires some financial considerations. In addition to providing a down-payment and other upfront costs, your lender will evaluate your ability to repay your loan by calculating your debt-to-income ratio. This ratio compares your debt payments to your income and can affect the terms of your mortgage. If you are wondering what debt-to-income ratio will affect your mortgage, you have come to the right place. In this blog, we will examine what a debt-to-income ratio is and how it will affect your mortgage.
What is a Debt-to-income Ratio?
Debt-to-income (DTI) ratio is the percentage of your income used to pay off your monthly or annual debt. You can calculate your DTI ratio by summing up your debt and dividing it by your gross income. Your gross income is the amount you earn before taxes and deductions. For example, if your monthly gross income is $5,000 and your credit card bills, auto loan payments, rental costs and other liabilities add up to $2,500 every month, your debt-to-income ratio is 50%. That means that 50% of your income is being used to service your debt. Your DTI ratio demonstrates your financial health and your ability to manage your debt with your income.
How does a debt-to-income ratio affect your mortgage?
When you apply for a mortgage, your lender will examine every aspect of your finances to determine if you can keep up with your payments and return their money on time. Lower-debt-to income ratios make it easier for borrowers to be approved for a mortgage. While you can still qualify for a mortgage with a higher DTI ratio, you may have to pay higher interest rates.
What is an ideal debt-to-income ratio?
A DTI ratio of 36% or less is considered good. Lenders typically prefer borrowers to have a DTI ratio of 43% or lower, although some lenders may accept higher ratios by offering higher interest rates to compensate for the risk. A lower DTI ratio generally indicates that you have more disposable income and are less likely to default on your debts. You can lower your debt-to-income ratio by:
- Paying down high-interest debt.
- Increasing your income.
- Making a budget and having a financial plan.
- Consolidating your debt into one loan with a single monthly payment.
Although important, the DTI ratio is only one of the financial metrics used by lenders in making credit decisions. Your overall financial health is also measured by your credit history. A good mortgage professional can help you evaluate all your options for financing a home in your current situation. Contact us today to find out how you can get started.
