Why Debt-to-Income Ratios Matter to You
Want to know how much house you can afford? Your DTI is one of the most important numbers factors in determining home loan approval.
Your debt-to-income ratio is calculated by dividing your monthly debt obligations by your gross income. Lenders typically look for a DTI of 36% or lower.
That being said, there are actually two different types of DTI. They are referred to as "front-end ratio" and "back-end ratio."
Front-End Ratio and Back-End Ratio
The front-end ratio only factors in your proposed mortgage, property tax, insurance and HOA fees. The back-end ratio is the figure that includes all recurring monthly debts such as credit cards, student loans, personal loans, and car loans as well as the proposed mortgage, property taxes and HOA fees.
The back-end ratio will give the your a more realistic idea of what to expect financially each month, and is typically higher than your front-end ratio.
As lenders we tend to focus on your back-end ratio because it gives us (and you) a more realistic idea of what you can expect financially each month but also what type of loan program would be best for you.
A DTI of 36% or lower is ideal for a conventional mortgage but there are loan programs available that allow for higher DTI's up to 45%.
Lowering Your DTI
Having a higher DTI can come from having multiple lines of credit open with high balances. A great way to start lowering your DTI is to pay off any high interest credit cards and other consumer debt.
Taking these steps should work in increasing your credit score, which ultimately will help to ensure you're getting a low mortgage interest rate. That's not to say that there aren't other factors that affect your mortgage interest rate but good credit is a major part of it.
Another way to lower your DTI, and one I'm sure you'd prefer, is with a pay raise. More income will lower your DTI if you do not increase your debt once you receive the pay raise.
Most importantly, if you are in the process of wanting to buy a home and starting to look at mortgage options do not take on more debt at this time. This will increase your DTI, could possible have a negative affect on your credit score and will may impact your final mortgage interest rate.
DTI Ratio Is Only One Number
While having a good looking DTI is helpful, if you are in the 36%-45% range for a back-end ratio you should still consider other monthly expenses that we do not factor in such as utilities, groceries, gas, child care etc.
At Popish Mortgage Group we strive to educate our borrowers and ensure they understand exactly how much money they will be left with each month for savings and money for entertainment. Our goal is to ensure our clients end up with an affordable mortgage that still allows for comfortable living, and to avoid them being "house-poor."
Interested in learning more about Popish Mortgage? Please contact us today!