What is DTI?
Summary: DTI, or debt-to-income, calculates the percentage of your monthly income that goes towards your monthly debt. Determining your debt-to-income ratio helps to ensure applicants have enough to make monthly payments throughout the life of the loan. To calculate your DTI, you divide your total monthly minimum debt payments by your monthly income.
Before you buy a house, your debt-to-income ratio is evaluated, but what is it? DTI, or debt-to-income, calculates the percentage of your monthly income that goes towards your monthly debt. For homeownership, DTI evaluates your financial status to see if you qualify for a mortgage.
When you get a mortgage, mortgage lenders want to ensure you have the means to repay it. Determining your debt-to-income ratio helps to ensure applicants have enough to make monthly payments throughout the life of the loan.
How do you calculate your DTI? You take your monthly minimum debt payment (ex: credit card, car payments, student loans or anything that would show up on a credit report) and divide this number by your monthly income. For example, let us say every month you owe $55 for credit cards, $300 in student loans, and $600 in car payment. Your monthly debt amount is $955. Let us say your monthly income is $4,000.
DTI = 955 (monthly debt amount)/4000 (monthly income) = .23
.23 x 100 = 23%. In this scenario your DTI is 23%
When you calculate your DTI use the minimum payment for each debt. If your minimum card payment is $55 but you pay $100 each month, use $55 in this situation for your DTI calculation.
Although most lenders prefer applicants to have a DTI ratio of 36% or lower, the highest ratio you can have and still be considered for a loan caps at 43%. Due to the variety of loans available to consumers, different loans have different DTI caps. For FHA loans the maximum DTI is 57%, USDA loans is 41%, VA loans is 60%, and fixed rate loans like conventional loans is 50%.
In addition to mortgages, DTI is also used for car loans. The lower the DTI ratio the higher the chance of getting the loan. If individuals have a high DTI taking out a loan may not be a healthy financial decision.
There are also ways to lower DTI. Individuals can pay off debt, bring in more monthly income, or add a spouse or partner —who has a lower DTI than you—to the loan.
If you would like to calculate your DTI, all you need is your credit report! Individuals have access to a free credit report once every 12 months from the three nationwide credit reporting companies (Equifax, TransUnion, and Experian). Once you have your credit report you can use the DTI formula above to calculate your DTI ratio. Make sure to recalculate your DTI as you pay off your debit to see if your ratio is increasing or decreasing!
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