If you are in the early stages of preparing for a home purchase, you’ll want to start looking into your debt-to-income ratio (DTI). Many first-time homebuyers are familiar with the importance of credit score and job security when buying a home, but it’s important to remember that DTI plays an equally important role.
…So, what exactly is DTI?
It is simply the total percentage of your income set aside exclusively for covering your monthly debts. In the context of buying a home, your DTI is used to determine how much you can reasonably borrow without stretching yourself too thin financially.
How Do I Calculate My DTI?
To calculate your debt-to-income ratio, all you have to do is divide your monthly debt obligations by your gross income. Ideally, the end results will be ~ 36% or lower. If it ends up being higher, you may have trouble finding a lender who is confident enough to provide favorable mortgage terms.
Expenses like transportation, food, insurance and utilities often are not factored in when calculating DTI. Be sure to keep this chiefly in mind, because you might end up getting approved and borrowing much more than you could comfortably repay once these other expenses are tacked on.
Improving Your DTI
Remember that your debt-to-income ratio will not only help you qualify for a favorable loan, but it will also help you determine whether you can repay that loan while still keeping up with your other debt obligations. If your DTI results are high at the moment, that’s okay! You’ll thank yourself for working to improve it so you can comfortably take out a mortgage in the future. Here are some methods to lower your DTI:
- Do not make large purchases with credit before purchasing a home
- Try to pay off as much debt as possible before applying for a mortgage
- Do not take on any additional debt
Check Your Debt-to-Income Ratio with Clearview Realty
Clearview Realty helps home buyers in Colorado, Florida and California understand the different types of mortgages that are available and provides loans to help people achieve the dream of homeownership. Since the specifics of which mortgage to choose is dependent on a variety of factors, we encourage you to call us for more information and find out which is right for you. Our number is (720) 217-5731, or you can send us a message.