As you begin your journey toward homeownership or buying a new home, one of the factors that is most crucial for your success is your DTI. Understanding and optimizing your Debt-to-Income Ratio (DTI) is a key step in securing the mortgage terms you want. Lenders use the DTI to assess your financial health and determine your ability to manage additional debt responsibly, so optimizing your DTI not only improves your chances of mortgage approval but also ensures that you can comfortably handle the financial responsibilities of homeownership.
We will look at your DTI as a key component of your approval for many different loan types. Contact us any team to learn more about the loan options we offer, or to talk with one of our loan officers to find out what you can be doing now to prepare for a success loan application process.
What is DTI?
DTI is a crucial financial metric that compares your monthly debt payments to your gross monthly income. Lenders use this ratio to evaluate your ability to manage new debt, specifically a mortgage. The formula for calculating DTI is simple: DTI = your total monthly debt payments / your gross monthly income.
For example, if you make $500 in total monthly debt payments and have a gross monthly income of $5,000, your DTI would be 10%.
In most cases, we are looking for a DTI below 41% to be approved for a mortgage, though there are many factors that come into play.
What can I do to improve my DTI?
If you do the basic calculation and realize you need to optimize your DTI before buying a home, there are few simple things you can start doing now to work toward that goal.
Reduce Existing Debt
Now is a great time to start tackling any debt you have. Look for ways to adjust your monthly budget, or even temporarily increase your income, to pay down existing debts. Start by aggressively paying down existing debts, especially high-interest credit cards and personal loans. Focus on eliminating or significantly reducing outstanding balances to create more room in your budget for mortgage payments.
Increase Income
We know it may be easier said than done, but it’s worth exploring opportunities to boost your income, such as negotiating a salary increase, taking on a part-time job, freelancing, or starting a side business. Additional income can positively impact your DTI by increasing the gross monthly income component of the ratio.
Refinance
Evaluate your existing debt structure and consider refinancing options to find out if you can secure more favorable terms. Refinancing high-interest loans or consolidating debts into a more manageable structure can reduce monthly payments, improving your overall DTI even if you don’t have significant cash to put toward the debt right now.
Avoid New Debt
Minimize the acquisition of new debt in the months leading up to your mortgage application. This includes avoiding major purchases on credit, such as a new car or significant personal expenses. New debt increases your DTI and may raise red flags for lenders. Remember, even after you have been pre-approved it is essential to not take on any new debt because a change in your DTI during the escrow process has the potential to derail your approval.
By strategically managing your existing debt, increasing income, and making informed financial decisions, you can enhance your DTI and improve your chances of securing a mortgage with favorable terms. If you want to learn more about your DTI or preparing to apply for a mortgage, contact us any time. Whether you are ready to apply now or are thinking ahead, we’re here to help.