What Is A Debt-To-Income Ratio With Mortgages, And What Do Lenders Look For?
When applying for a mortgage loan, a lender will perform a lot of various steps to determine if you are eligible for a loan. The purpose of this is to make sure you meet the criteria for a mortgage loan, and one of the many steps lenders perform in this process is calculating a person's debt-to-income (DTI) ratio. If you are not sure what this is, here is an explanation of what a DTI ratio is, what lenders look for in it, and why it is so important to lenders.
The definition of a DTI ratio
In the world of mortgage lending, one of the most important ratios lenders view, calculate, and analyze is called a DTI ratio. This ratio is used as a way of comparing a person's debts to their income, and it is a ratio that is very important to lenders. If you want to calculate your DTI ratio, you would need to add up all the debts you have and then divide the total by your income. This will tell you how much debt you have compared to the amount of money you earn. You need to include every monthly debt you have in this calculation, including your mortgage payment, car payment, student loan payment, credit card payments, and any other debts you pay each month. The income amount to use is your gross monthly income.
What lenders look for
Lenders primarily look at the answer to this ratio when evaluating loan applications, and the magic number most lenders look for is 43% or under. If your DTI ratio is at 43%, it means that 43% of your income is promised away before you even receive it. This leaves you with 57% of your income remaining.
Lenders have found that if a person's DTI ratio is above this percentage, they will have a hard time paying their bills and may soon experience financial distress with their budgets. Because of this, you might get turned down for a loan if your DTI is above this percentage. If this is the case, you could work at paying off some of your debts and finding a way to increase your income, as doing these two things would greatly affect your DTI ratio.
If you apply for a mortgage, you can count on the lender calculating this ratio. If you have questions or would like more information about home loans, contact a lender today.