A high debt-to-income ratio makes it difficult, if not impossible, to buy a home. When housing prices are high, and people are weighed down with large amounts of debt (such as student loans, car payments, credit card debt, etc.), qualifying for a mortgage can be more difficult.
So, what exactly is the debt-to-income ratio?
The debt-to-income ratio, also known as a DTI ratio, is a metric that mortgage companies use to determine whether you can afford a mortgage payment. The two critical numbers in this calculation are gross income and total debt.
Total debt includes your car payment, credit card payments, student loan payments, and the new potential mortgage amount. Most banks allow a DTI ratio of up to 43%.
How to Calculate DTI?
Imagine that you and your partner have a combined, total household income of $10,000, and then that your total monthly debt payments are $5,200 (including your new potential mortgage). Divide $5,200 by $10,000 for a DTI ratio of 52%. In this case, you would be OUTSIDE the 43% DTI ratio guideline.
Are you wondering if you can afford to buy a first home, move-up home or purchase an investment property? The best way to start your journey to homeownership is to have the right team and a solid plan in place.
Contact me for a list of qualified lenders who can help you make sense of mortgage financing including ways to improve your debt-to-income ratio.
