When it comes to buying a home, there is a lot of confusing jargon. This is true even if you aren’t a first-time homebuyer. One thing people will often hear when applying for a mortgage is debt-to-income (DTI) ratio. At First Fidelis LLC, our team wants to explain what the debt-to-income ratio is and how it can affect your home loan.
What Does Debt-to-Income Ratio Mean?
To calculate your debt-to-income ratio, you will take your monthly debt payments divided by your gross, or pre-tax, monthly income. This ratio does not take into account monthly expenses like utilities, food, transportation, health insurance, and any other necessities.
The purpose of DTI ratios is to assess someone’s ability to manage further payments, such as home loans. A mortgage lender will use your debt-to-income ratio to help determine what home loans you qualify for.
All mortgage lenders must account for debt-to-income ratios. However, small creditors have more leeway. While they are still required to take debt-to-income ratios into account, these lenders are allowed to offer a Qualified Mortgage at higher debt-to-income ratios.
How Does Your Debt-to-Income Ratio Affect Your Home Loan?
Debt-to-income ratios play a significant role in qualifying for mortgage loans. These percentages help lenders determine how much you can borrow based on your income and the debt you already have. Many lenders say that a debt-to-income ratio of 28 percent is ideal before it gets too high. While 28 percent is considered ideal, most lenders say the highest ratio that still allows people to obtain a home loan is 36 percent. There are some exceptions, however.
Your debt-to-income ratio plays a significant role in determining what mortgages you qualify for, but it is not a full measure of affordability. Because there are expenses like insurance and food that the lender doesn’t take into account, you may be approved for a mortgage that is more than you are willing to pay each month.
How to Lower Your Debt-to-Income Ratio
You will want the lowest DTI ratio possible to qualify for the best lenders, buy the home you want, and ensure you can pay your debts while still living comfortably.
A DTI that is too high signifies to mortgages lenders that you may struggle to make your monthly payments; therefore, you may find it challenging to qualify for a home loan. Luckily, there are things that you can do to lower your debt-to-income ratio if you are planning to buy a home in the near future.
Buying a home requires you to save a significant sum for the down payment, which can take months or even years. While you are saving for this down payment, there are also ways that you can slowly decrease your debt-to-income ratio.
First, do not take on any more debt, including car and student loans. It would help if you also refrained from making big purchases on a credit card before buying a home. Lastly, it is a good idea to pay off as much of your debt as possible before applying for a mortgage. Consider paying more than the minimum payment on your current debts to begin to decrease your debt-to-income ratio slowly.
At First Fidelis LLC, we are dedicated to helping each of our customers qualify for a mortgage that gets them their dream home. Call us today at 913-205-9978 to learn more!