What is Debt-to-Income Ratio (DTI)?
DTI, 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. Before 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.
To calculate your DTI ratio, take your total monthly minimum debt payments (ex: credit card, car payments, student loans and any other forms of debt that would show up on a credit report) and divide it by your monthly income.
Most mortgage lenders prefer applicants to have a DTI ratio of 36% or lower, but different loans have different DTI caps. For FHA loans the maximum DTI is 57%, USDA loans are 41%, VA loans are 60%, and fixed rate loans like conventional loans are 50%.
If your DTI ratio is too high for your loan type, below are a few tips to help lower it.
- Pay a little more than the minimum amount.
- Avoid spending.
- Earn extra money.
- Utilize a credit card balance transfer that has a limited zero-interest period or promotion.
- Recalculate your debt.
For more information, chat with us at callhallfirst.com or give us a call at 866-Call-Hall.