Most acceptable debt to income ratio for mortgage
Learn what lenders are looking for and how to calculate your DTI.
What is debt to income ratio (DTI)?
Debt to income ratio is simply a measure of how much debt you are paying per month compared to how much money you make per month before taxes or other deductions (gross income).
How is debt to income ratio calculated?
DTI is calculated by dividing your monthly debt payment by your monthly gross income multiplied by 100 to get a percentage.
Example.
Monthly debt load = $2560.
Monthly income (gross) = $8000.
What is the most acceptable debt to income ratio?
The most acceptable debt to income ratio that most lenders prefer is 36% or lower.
The lower the ratio the better. A low DTI simply indicates that most of your income is not being used for servicing debts and that you can manage a mortgage. This helps boost the confidence of lenders in you and actually makes lend you money. A high DTI that most lenders can still consider is 43%.
High DTIs however are not a good sign and might scare lenders away because a huge chunk of your income is basically paying debts. They’re simply not sure that you’ll be able to pay them back in case anything happens to your main source of income.
There’s a slim chance depending on the lender that the furthest they might go is 49% depending on other factors. Nonetheless maintaining a lower percentage is the best way to secure a mortgage.
What is front end debt to income ratio?
Simply put, a front end DTI is a measure of what percentage of your debt is servicing housing costs such as mortgage insurance or payments.
Instead of dividing total monthly debt load by gross monthly income, front end is calculated by dividing housing expenses by gross monthly income multiplied by 100 to get a percentage.
Most lenders consider 28% or lower to be a good front end DTI. However depending on the lender that figure might vary since they all analyze different other factors related to your DTI.
Why is debt to income ratio important?
- Helps lenders determine if they’ll lend you money.
- If your percentages are looking good you’ll be approved quicker.
- It can help your loan modification process and therefore avoid closure.
- Help you keep track of your personal finance.
How can you lower your DTI ratio?
- Try paying more than your minimum limit.
- Consider your housing expenses such as rent.
- Pay high interest loans first.
- Get a promotion (increase your income).
- Consult professional financial advisers.
Conclusion
Debt to income ratio is pivotal in helping you secure mortgage. Just like credit score is important to lenders, so is DTI. A good ratio can afford you quick processing and loan modification during hard times. You can also use DTI ratio as a simple tool to track the health of your finances.
