When it comes to buying a home, most people will need to take out a mortgage. But, not everyone will have the same experience when it comes to getting approved for one. That’s because lenders look at a variety of factors when deciding who to lend to and how much to lend. One of the most important factors is your debt-to-income (DTI) ratio. Let’s take a closer look at what this means and how it affects your ability to get a mortgage.
What is a DTI ratio?
Your DTI ratio is a measure of how much debt you have compared to your income. To calculate it, you’ll need to add up all of your monthly debt payments (such as credit card bills, car loans, and student loans) and divide that by your gross monthly income. The result is a percentage that represents your DTI ratio.
For example, if your monthly debt payments add up to $1,500 and your gross monthly income is $5,000, your DTI ratio would be 30% (1,500 / 5,000 = 0.3 or 30%).
Why do lenders care about your DTI ratio?
Lenders want to make sure that you can afford to make your mortgage payments each month. If you have a high DTI ratio, it means you’re already spending a large percentage of your income on debt payments. This can make it harder for you to make your mortgage payments and increase the risk that you’ll default on your loan.
That’s why most lenders have a maximum DTI ratio that they’re willing to accept. This can vary depending on the lender and the type of loan you’re applying for, but generally, you’ll want to aim for a DTI ratio of 43% or lower.
How does your DTI ratio affect your mortgage application?
Your DTI ratio is just one of the factors that lenders will consider when reviewing your mortgage application. They’ll also look at your credit score, employment history, and other financial factors. However, your DTI ratio can have a big impact on your ability to get approved for a mortgage.
If your DTI ratio is too high, you may not be able to qualify for a mortgage at all. Or, you may only be able to qualify for a smaller loan amount than you were hoping for. On the other hand, if your DTI ratio is low, you may be able to qualify for a larger loan amount or get a better interest rate.
How can you improve your DTI ratio?
If your DTI ratio is too high, there are a few things you can do to improve it:
- Pay off some of your debt: If you can pay off some of your debt, your monthly debt payments will go down, which will lower your DTI ratio.
- Increase your income: If you can increase your income (such as by getting a raise or taking on a side hustle), your DTI ratio will improve.
- Delay your home purchase: If you’re not in a rush to buy a home, you can work on paying down your debt and improving your DTI ratio before you apply for a mortgage.
What are some DTI mortgage lenders?
Now that you understand what a DTI ratio is and why it’s important, you may be wondering which lenders are willing to work with borrowers who have a high DTI ratio. The good news is that there are many lenders out there who specialize in working with borrowers who have less-than-perfect credit or high DTI ratios.
Some of the top DTI mortgage lenders include:
- Quicken Loans
- Carrington Mortgage Services
- Caliber Home Loans
- PennyMac
- American Financing
Keep in mind that just because a lender specializes in working with borrowers who have a high DTI ratio doesn’t mean they’ll approve everyone. You’ll still need to meet their other qualification requirements and have a solid credit history.
Conclusion
Your DTI ratio is a crucial factor that lenders will consider when deciding whether to approve you for a mortgage. By understanding what it is and how it affects your application, you can take steps to improve your DTI ratio and increase your chances of getting approved for the home loan you need.