Key Takeaways:
- Debt-to-income ratio helps lenders determine how much house you can afford.
- A lower DTI ratio is more appealing to lenders because it shows you have more financial flexibility and are less risky to lend to.
- Borrowers with high DTI ratios may have a harder time getting approved for a mortgage.
When it comes to getting approved for a mortgage, lenders look at more than just your credit score and income. They also care about how much debt you have. Even with a strong credit score and other factors, having significant debt can make affording a home difficult, since even one unexpected expense could stretch your budget too thin.
Understanding what debt-to-income ratio you need to get approved for a mortgage can help you plan and prepare for that process. By strengthening your financial profile, you’ll put yourself in a better position to own a home.
What is debt-to-income ratio
Lenders use debt-to-income ratio to determine how much a potential borrower can afford to pay on a mortgage. This ratio includes most sources of debt and income, but it doesn’t include everyday expenses like utilities or groceries. Generally, having a higher debt-to-income ratio makes it harder to secure financing to buy a house.
How to calculate your DTI ratio
Calculating your DTI ratio is pretty straightforward. First, add up your monthly debt payments.
These can include:
- Mortgage payments
- Rent payments
- Credit card payments
- Auto loans
- Personal loans
- Other regular debt payments
After that, simply divide that number by your gross monthly income to find your debt-to-income ratio.
Monthly debt payments / Gross monthly income = DTI
For example, let’s say you currently pay $2,000 per month on your current mortgage and $400 per month on other debts. If your gross monthly income is $7,000, your DTI would be about 34%.
($2,000 + $400) / $7,000 = ~0.34
It’s also important to understand which expenses do and don’t factor into your DTI so you get an…