Understanding Debt-to-Income Ratio: A Key to Homeownership
What is Debt-to-Income Ratio & How Does it Impact Your Buying Power?
Buying a home is an exciting goal, but before you start house hunting, it’s important to understand a key factor that lenders look at—your Debt-to-Income Ratio (DTI). Your DTI plays a big role in whether you qualify for a mortgage and how much you can borrow. The good news? There are ways to improve your DTI and set yourself up for homebuying success!
What is Debt-to-Income Ratio?
Your DTI is a percentage that compares your monthly debt payments to your monthly income. Lenders use this to see how much of your income is already committed to debts and whether you can comfortably afford a mortgage payment.
How to Calculate Your DTI
- Add up all your monthly debt payments. This includes:
- Car loans
- Credit card minimum payments
- Student loans
- Personal loans
- Other monthly debts (excluding utility bills, insurance, groceries, and other daily living expenses)
- Divide the total by your gross (before-tax) monthly income.
- Multiply by 100 to get a percentage.
For example:
- Your monthly debts = $1,500
- Your gross monthly income = $5,000
- 1,500 ÷ 5,000 = 0.30 (or 30%)
Most lenders prefer a DTI of 43% or lower, though lower is always better for getting the best loan options.
How to Improve Your DTI and Afford More Home
If your DTI is too high, don’t worry! Here are some smart ways to reduce your debts and improve your homebuying chances:
1. Pay Down Expensive Debts First
- Focus on high-interest credit cards and personal loans.
- Make extra payments whenever possible to lower balances faster.
2. Reduce or Eliminate a Costly Car Payment
- If you have a high monthly car payment, consider:
- Paying it off early if possible.
- Refinancing for a lower payment.
- Selling and downsizing to a more affordable car.
- Lowering your car payment can free up hundreds of dollars toward your future mortgage.
3. Avoid Taking on New Debt
- Hold off on big purchases that require financing.
- Keep credit card balances low and avoid opening new accounts.
4. Increase Your Income
- Ask for a raise at work or take on extra hours.
- Start a side hustle to bring in additional income.
5. Stick to a Budget
- Track your expenses and cut unnecessary spending.
- Use extra savings to pay off debt faster.
6. Remember What’s NOT Included in DTI
- Your utility bills, phone bills, car insurance, groceries, and other daily expenses are NOT included in your DTI calculation.
- However, reducing these expenses can free up extra cash to pay down debt faster and improve your overall financial situation.
Why Work with a Mortgage Broker?
When you’re working toward homeownership, a mortgage broker can be your best resource! Here’s why:
✅ More Loan Options – Brokers have access to multiple lenders, so they can find the best rates and loan programs for your situation.
✅ DTI Improvement Strategies – I’ll help you understand your DTI and suggest ways to improve it before applying for a mortgage.
✅ Lower Costs – Unlike big banks, brokers can often find loans with lower fees and better terms.
✅ Personalized Guidance – I’ll walk you through the entire process and make sure you’re in the best financial position to buy a home.
Let’s Make Homeownership Happen!
If buying a home is your goal, let’s work together to improve your finances and find the best loan options for you. Send me your current lender estimate, and I’ll review it to see how I can help improve your options and bottom line.
Have questions? Let’s connect today!
📞 (913) 705-0049
📧 Theresa@SummitLendingUSA.com
🌐
Apply Now
