When it comes to your financial health, there are many variables to consider, especially when it’s time for you to apply for a loan like a mortgage.
One of the first terms you hear when you meet with a mortgage lender is “debt-to-income ratio,” also called DTI. Just like with your credit score, your debt-to-income ratio is another part of your financial picture and lets your lender know about your overall debt.
What Does Debt-To-Income Ratio Mean?
Your DTI essentially compares how much you owe to how much you earn every month. We calculate what percentage of your gross monthly income – which is what you make before taxes – is used to pay any loans, credit cards or other debt.
Using tools like your DTI and credit score helps lenders figure out how much loan you can afford. A lower DTI ratio generally shows a good balance between debt and income and is an indication that you have the ability to repay your loans.
How DTI Affects Your Mortgage Loan
When I meet with my customers, I explain that at INB, we do look at a lot of factors to qualify for a mortgage, including Total Debt to Income (TDTI).
In general, we like to see below 45% for Total Debt to Income. This means, for example, that if your household has a gross monthly income of $10,000, you don’t have more than $4,500 in debt payments.
It’s especially important to note that this calculation includes the debt of your new mortgage payment – principal, interest and escrows for taxes, insurance and any private mortgage insurance.
Your debts that we look at also will include any monthly payments, revolving loans, installment loans, child support or alimony you might pay.
How to Figure Out Your Debt-To-Income Ratio
To calculate your DTI:
- Total your monthly debt payments, including loans, credit cards and any other mandatory payments.
- Divide that number by your gross monthly income (before taxes).
- This number will be a decimal, so multiply by 100 to get your DTI percentage.
Remember, your DTI is just one metric we look at when considering your mortgage loan at INB. Come sit down with me to figure out all your numbers and ask any questions you have! Give me a call today.