What You Need to Know about Debt to Income Ratio When Buying a Home
If you have a lot of debt, you could have a hard time paying your bills. This is why mortgage lenders pay attention to debt-to-income ratio. Understanding what the debt-to-income ratio is and how it affects your ability to get a mortgage can help you prepare for the mortgage application process.
By checking your debt-to-income ratio before applying for a mortgage, you may be able to identify potential problems and resolve them prior to filling out a mortgage application. If you're thinking about buying a home soon, find out what your DTI is. If your DTI is too high, you would be best off lowering it. Here's what you need to know about DTI and how it affects you.
How to Calculate Debt-to-Income Ratio (DTI)
Put in simple terms, DTI is the sum total of your monthly debt payments, divided by your monthly income. The resulting figure is turned into a percentage. For example, if you pay $2,000 each month in debt payments, and your gross monthly income is $5,000 each month, then your debt-to-income ratio is 40%.
There are multiple debt-to-income ratio calculators online that can help you determine your DTI. If you're not able to use the online calculators, you can also contact a lender and ask them to do the equation for you.
Why is DTI Important
Borrowers who have a high debt-to-income ratio are more likely to default on their mortgage. These borrowers are considered high-risk, meaning there is more risk for the lender. In some cases, borrowers with high DTI might be approved but with a high interest rate. If the DTI is too high (over 43%), then they may not be approved at all.
In addition to the fact that a high DTI could correspond to a possible default on mortgage payments, it's also likely that a high DTI could lead to reduced quality of life, especially after buying a house. Even if the buyer doesn't default on their payments, life could be very difficult until their debt-to-income ratio has been reduced.
How Can You Reduce DTI
Home buyers with a high DTI would be well advised to reduce their debt before trying to buy a home. Often, buyers do this by paying off their credit cards and other debts. Doing this may require careful budgeting. Often, home buyers need all the cash they have in order to pay for their down payment and moving expenses. Paying off debt and saving at the same time can be very difficult.
Lowering DTI does not always mean paying off debt. Sometimes, a home buyer with too much debt is able to reduce their DTI by getting a better, higher-paying job. Although it's unusual for a buyer to find a job that pays so much more money that they're able to significantly reduce their DTI, it is possible. For couples who are trying to buy a home, it can help if both buyers are able to find a higher-paying job.
Contact a Real Estate Professional to Get Started
If you're a Prairie Creek home buyer with a high DTI, it will be very important for you to buy an affordable home. Often the best way to make this happen is to work with a real estate professional. A good real estate agent can help you find the best homes in the most affordable communities. A good real estate agent can also help you negotiate a fair price for the home that you want to buy. If you're thinking about buying a home sometime in the next several months, contact a real estate agent in your area.