There are several important factors to consider when applying for a mortgage. Your credit history and score may be the first item you think of when it comes to mortgage rates and what you may qualify for. Down payments are also helpful in determining the outcome. But one consideration many people forget it their debt-to-income (DTI) ratio. Your DTI will impact your overall financial health and plays a large role in securing a loan. Knowing a person’s DTI helps lenders assess their risk when lending money. If your DTI is too high, it’s a good indication that paying the loan off will be a strain, informing the lender that it’s probably not a good financial strategy for that individual as well as the institution loaning the funds.
The average recommendation for a person’s DTI is around 35% or less. Keeping your debts below this range allows for breathing room for other payments as well as living life comfortably. If your ratio starts dipping into the range between 36% and 49%, you may be handling everything okay but it’s a good idea to assess your debts and improve. This range starts to be strenuous even if you can make ends meet. Once you tip over 50%, you will want to take action to lower your debts as quickly as possible. You lending options are going to limited in this range because you will be seen as higher risk. This is for the protection of the individual as well as the lender.
Calculating Your DTI
The best way to calculate your DTI is to add up your monthly bills and divide the total by your gross (before taxes) monthly income. The result will be your ratio as a percentage which will inform lenders if you are high risk or in a good spot to take on another payment. When determining your monthly bills, be sure to include any rents or other house payments, alimony or child support payments, all loans including student and auto, all credit card debts (you only need to calculate the minimum monthly payment, even if you consistently pay extra each month), and any other required monthly debts. Expenses such as groceries, utilities, and taxes are not included in the DTI calculation, but if you have day care expenses, consistent transportation costs, or other required monthly items, be sure to keep those in mind in addition to your DTI percentage.
It’s important to note that DTIs are calculated to protect you as well as the lender. The last thing you want to do is get into a mortgage loan that is going to create a stressful situation. Regardless of the excitement you’re feeling about a home, nobody wants to be “house poor.” Because of this, it’s very important to be thorough and honest with your DTI as well as spending habits to ensure you get into a good situation when buying your home.
The team at InterWest Mortgage can help you calculate your DTI and work with you to ensure you get into a mortgage loan that is the best for your specific situation. Our cknow how to assess your financial obligations in order to protect you and your family.