What Is a Good DTI Ratio?
When you apply for a mortgage, lenders look at your income and how much you pay each month towards debts like vehicle loans or leases, credit cards, personal loans and child support. They use this information to calculate your debt-to-income ratio percentage. Combined with your credit history, these two factors help them evaluate if you can repay the mortgage funds you are applying for. Here is everything you need to know about DTI ratios and how they affect your chances of being approved for a home loan.
How do I Calculate my DTI Ratio?
To calculate your DTI ratio, add up all your monthly debt payments and divide that amount by your gross monthly income. Do not include utility costs, insurance premiums, retirement fund contributions or money spent on gas, food or clothing.
For example, if a borrower pays $600 on a car loan, $200 towards credit card debt and anticipates a mortgage of $1,300, the monthly debt would total $2,100. Dividing this amount into the borrower’s $6,000 gross monthly income results in a DTI ratio of 35 percent. There are online DTI calculators available to help you do this math.
What Is a Good DTI Ratio?
An ideal DTI is 20 percent or less, but anything smaller than 36 percent is considered good and demonstrates you can manage the debt. A good DTI gives you a better chance of being approved for your loan and generally gives you access to the best mortgage terms.
What if I Have a Higher DTI?
The higher your DTI is, the harder it will be for you to qualify for a mortgage. If you fall in the 36 to 49 percent category, you may still be approved with an excellent credit history, large down payment or a year’s worth of cash reserves. Your best option is to take steps to reduce your debt before you apply for a home loan. Consider getting a personal loan to consolidate and pay off your debts, as those are issued at higher DTI ratios.
A DTI ratio of 50 percent or higher will make it difficult for you to qualify for a mortgage as lenders believe it will be harder for you to handle this level of debt and a mortgage payment. To improve this ratio, you need to bring in more money each month or reduce your debt.
What Mortgages Do I Qualify For?
Conventional mortgages generally require a 43 percent or less DTI ratio, and FHA loans can be approved at as high as 50 percent. Your best option is to talk to a mortgage wholesaler with access to many different lenders.
A good DTI ratio of 36 percent or lower puts you in a great position to qualify for a mortgage and purchase a home of your own. Combined with an excellent credit history, your good financial information proves to lenders that you manage your finances responsibly.
At UW Funding, we shop the lenders to find the right mortgage for your needs, even if you have a high DTI ratio. We will select the one that saves you money and provides you with the personal service you deserve. Contact us today to put our years of experience to work for you.