The Debt-to-Income Ratio

If you are a first time home buyer, or are considering buying you might find yourself wondering, “what the heck is my debt-to-income ratio? And how does it affect me in purchasing a home? If this is the case,  follow along. We have connected with Michelle Schmidt from Movement Mortgage who has provided information from a lenders perspective on how to not only determine your debt-to-income ratio, but also how it affects the purchase of a home.

Michelle explained, “The debt-to-income ratio (DTI) is a financial metric that compares your monthly debt payments to your gross monthly income. It is expressed as a percentage and is used by lenders to assess your creditworthiness and ability to repay a loan.”

Let’s first discuss how you can determine what your debt-to-income ration is.

To calculate your DTI, you will need to:

1. Add up all of your monthly debt payments. This includes things like your mortgage or rent, car payments, student loans, credit card minimum payments, and any other recurring debt obligations.
2. Divide your total monthly debt payments by your gross monthly income. Your gross monthly income is your income before taxes and deductions.
3. Multiply the result by 100% to express your DTI as a percentage.

For example, if your monthly debt payments are $1,000 and your gross monthly income is $4,000, your DTI would be 25% (1,000 / 4,000 x 100).

Is a higher or lower ratio better?

Generally, a lower DTI is better. A DTI of 36% or lower is considered to be good, while a DTI of 43% or higher is considered to be high. However, it is important to note that these are just general guidelines, and lenders may have different DTI requirements depending on the type of loan you are applying for.

Click here for a debt-to-income ratio chart

Here are some of the things that can affect your DTI:

• The amount of debt you have
• Your income
• Your interest rates
• Your minimum payments

You can improve your DTI by:

• Paying down debt
• Increasing your income
• Negotiating lower interest rates
• Making larger loan payments

Improving your DTI can make it easier to qualify for loans and get better interest rates. It can also help you save money on interest and free up cash flow for other things.

Here are some additional resources that you may find helpful:

• Consumer Financial Protection Bureau: https://www.consumerfinance.gov/ask-cfpb/what-is-a-debt-to-income-ratio-en-1791/
• Investopedia: https://www.investopedia.com/ask/answers/081414/what-counts-debts-and-income-when-calculating-my-debttoincome-dti-ratio.asp
• NerdWallet: https://www.nerdwallet.com/article/loans/personal-loans/calculate-debt-income-ratio

If you found this information is helpful but still have other questions please do not hesitate to reach out to Michelle Schmidt from Movement Mortgage or message us here to connect with one of our agents.