What is Debt-to-Income Ratio? DTI, Explained
When you're buying a home in Lakewood or Long Beach, you most likely need a mortgage loan (most people do). Your lender will take a look at your debt-to-income ratio - but what is that, and how does it affect your ability to get a loan? This guide explains.
After reading the information below, another blog post goes into this even further and was provided to us by one of our trusted financing referral partners. To read that blog, please visit
www.superbroker.com/blog/how-much-house-can-you-really-afford/
What is Debt-to-Income Ratio?
Your debt-to-income ratio (DTI) is the percentage of your monthly income that goes towards paying down debts. Lenders will look at this number to get an idea of how much financial stress you're currently under, and whether or not you're likely to default on your loan.
Generally speaking, a DTI ratio of 36% or below is considered healthy, while anything above that is considered a red flag. This number can be affected by a number of factors, so let's take a closer look.
Related: Can you use a VA loan to buy a duplex in California?
How is Debt-to-Income Ratio Calculated?
Your DTI ratio is calculated by taking your monthly debt payments and dividing them by your gross monthly income. Your debt payments include items like credit card bills, car payments, student loans, and child support.
Your gross monthly income is the amount of money you make in a month before taxes and other deductions are taken out. For example, if you make $3,000 per month after taxes, your gross monthly income would be $3,000.
Let's say your monthly debt payments are $500. Using the formula above, we would take $500 and divide it by $3,000. This gives us a DTI ratio of 16.7%.
Factors That Affect Debt-to-Income Ratio
As we mentioned before, there are a few factors that can affect your DTI ratio.
The first is your income. Obviously, the more money you make, the lower your DTI ratio will be. This is because you'll have more money available to put towards debt payments.
Another factor that can affect your DTI ratio is the type of debt you have. Some types of debt, like student loans, are considered "good debt" because they're an investment in your future. Other types of debt, like credit card debt, are considered "bad debt" because they don't offer any long-term benefits.
Lenders will usually give you a lower DTI ratio if you have more "good debt" than "bad debt."
The last factor that can affect your DTI ratio is the interest rate on your debts. The higher the interest rate, the more money you'll have to pay each month in interest payments. This can raise your DTI ratio and make it more difficult to get a loan.
Related: What’s the difference between an expired listing and a withdrawn listing?
How Debt-to-Income Ratio Affects Your Ability to Get a Loan
Your DTI ratio is one of the most important factors lenders look at when you're applying for a loan. A high DTI ratio means you're already struggling to make ends meet, so lenders see you as a higher risk for defaulting on your loan.
If you have a high DTI ratio, you may still be able to get a loan - but you'll likely have to pay a higher interest rate. This is because lenders see you as a higher risk and want to make sure they're getting compensated for that risk.
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