When applying for a mortgage, lenders consider various factors including your debt-to-income ratio (DTI). This ratio is the percentage of how much debt you owe and how much you earn monthly. Therefore, this indicator is an assessment for lenders to know your capability of repaying your mortgage loans. This may be confusing if you are still new to the term. But don’t worry! we have compiled the things that you need to know when it comes to the debt-to-income ratio for mortgages. Be sure to continue reading and find out how it works.
What does the Debt to Income Ratio Mean?
This financial metric is what lenders use to calculate how much of your monthly income you use to pay your debts. Basically, your debt-to-income ratio is calculated by dividing your monthly debts by your gross monthly income. For instance, if you pay 1000 dollars to your monthly debt and your monthly income is 5000, then your DTI ratio is 20%.
Why is the Debt to Income Ratio Important for Lenders?
Debt to income ratio is crucial for lenders to determine if you are a risky borrower. They need to assess your financial situation if you have the ability to repay them based on your monthly income and debt payments. Therefore, the higher the DTI, the less likely you qualify for a mortgage loan.
What Percentage Qualifies as a Good DTI Ratio?
Typically, you may have a high chance of getting a mortgage loan when your debt-to-income ratio is 43% or lower. However, you may be lucky if you stumble upon lenders who are willing to approve your mortgage loan application despite having a DTI ratio of 50%. Having a lower DTI ratio is more attractive for lenders to approve your mortgage loans and may even help you qualify for a lower interest rate.
How Can You Lower DTI Ratio?
A low debt-to-income ratio means that you have a good financial background. A lower DTI allows you to take on additional debts if you’re planning to invest in an asset. This explains why lenders use the DTI ratio to determine your suitability to apply for a mortgage loan. On the other hand, knowing your DTI also helps you manage your financial situation to make sure that you are not taking on any more debts that your gross salary cannot handle. Here are some ways that you can significantly lower your DTI:
- Try to reduce the interest on your debts
- Extend your loan’s duration to lower your monthly payment
- Find another stream of side income
- Avoid non-essential spending
- Try to look into loan forgiveness
Whether you’re applying for a conventional loan or a reverse mortgage, understanding the basics of debt-to-income ratio for mortgages is a step for you to determine if you are likely to get approval. At the same time, this financial metric helps lenders avoid risky borrowers who have a high DTI. By knowing what qualifies as a good debt-to-income ratio, you may now work on reducing your percentage and managing your financial situation better. If you need more information regarding DTI, feel free to contact us at Mann Mortgage and we will be happy to assist you!