Some may think that they are finally ready to buy a home. After all, there are plenty of mortgage loan options to make homeownership more accessible. That being said, the amount of current debt one has can make it harder to qualify for a conventional or other type of mortgage loan.
Debt-to-income ratio is one of a few important factors a lender will review when making their determination to approve an applicant for a home loan. Understand more about what a lender wants to see when it comes to debt-to-income ratio.
What Is Debt-to-income Ratio?
An applicant may think that they have a high likelihood of being approved but may be surprised about what they find out from speaking with a lender about their debt-to-income ratio (DTI ratio). When it comes to DTI ratio, a lender will want to compare the level of income a person has to any debts currently carried. It is important that a borrower has enough money remaining to make regular mortgage payments and not default on a loan.
How to Get an Estimate
An applicant may want to perform their own calculation using only their pre-tax income or the pre-tax incomes of both themself and their partner or spouse. This will then be compared to the monthly debt payments that they are currently responsible for, including items such as:
- Mortgage or rent payments;
- Credit card payments;
- Car payments;
- Student loan payments; and
- Child support and other debt payments.
Multiple the amount of debt by 100 and then divide it by the total pre-tax income to get a percentage of current debt levels. Those with lower levels of debt often find it easier to get approved for a mortgage loan. Individuals carrying a high level of debt can find it difficult to manage debt payments in the case of emergency expenses. Knowing one's own DTI ratio can provide information on current spending and debt management and may serve as a wakeup call.
What Is the Ideal DTI Ratio for Lenders?
Lenders often do not want to risk approving a borrower with a DTI ratio above 50 per cent. Some potential applicants may find it hard to get approved when their ratio is in the 40s. Those with a DTI ratio in the mid-30s and lower will have better chances of securing a mortgage. However, a lender will review other factors, such as one's credit score and credit history, as well as length of employment. Issues in these areas may increase the perceived level of risk of an applicant.
What Are Ways to Improve DTI Ratio?
One approach to lower the DTI ratio is by reducing or eliminating monthly recurring debt payments. Those with high levels of debt may want to speak with a debt specialist. Some find that living a simpler lifestyle for a period and getting rid of unnecessary expenses can help them reduce their debt. Another way that can be used in combination with the first is to increase one's monthly income. Picking up a second job, getting a promotion or renting a room in a home can all help with making improvements in this area.
Can You Afford a Home?
It is important to be in a financial position to be able to cover the costs of Upper Mission home ownership. Those looking to apply for a home loan may want to get a credit report from Experian, Equifax or Trans Union to get more information on how their finances and credit history may look to a lender.