What is a Debt to Income Ratio?
Your debt to income ratio (dti) is the amount you pay each month in debt relative to your monthly income. For example, if you earn $4,000 per month, and you pay $2,000 per month toward debt, your debt to income ratio is 50%.
Bills like groceries, cell phone, etc are not figured into DTI so be sure you know how much you will be comfortable spending before you start to look for a home.
If your debt to income ratio is a little high, most mortgage professionals offer stated loan programs. With a stated mortgage loan, you simply state how much income you make, provided it is within reason for your job field. Even though this option may be available to you, you still need to feel comfortable with your monthly mortgage payment.
Items considered in your debt ration are your total housing expense. This is the principle and interest on the proposed loan along with real estate taxes and homeowners insurance. Neighborhood association fees also count if they apply. Your installment and revolving debt are also calculated in this figure. Often times you may qualify for a much higher payment than you realize. Have your mortgage broker give you payment amounts so you are comfortable with the amount before you house hunt.
If you you have a debt that will be paid off in 10 months or less you may be able to exclude this payment from your debt to income ratio.
Your debt to income ratio, or DTI, is the general basis for how a lender calculates how much of a home or a home loan you can qualify for. By using the lenders maximum debt to income ratio guidelines, your current monthly expenses, and your total monthly income, a lender is able to figure out what the maximim mortgage payment you will qualify for will be. Then based on what loan program you decide to go with and the rate associated with that program, the lender can notify you of the maximum amount you will be qualified for on a mortgage.