What is DTI or Debt-to-Income Ratio?
As you apply for a home loan or refinance, you will hear the term debt-to-income ratio, or DTI. Read to learn what this means and how it can be even more important than your credit score in determining whether or not you are approved for a home loan.
Your debt-to-income ratio, or #DTI, is one of the main factors a lender will use when determining your ability to repay a new loan. Your DTI will impact whether or not your loan will be approved.
What is DTI?
DTI is the ratio or relationship between your monthly debts and your monthly income.
DTI is the ratio or relationship between your monthly debts and your monthly income. To calculate your DTI, simply add all your monthly payments or debts. Most common monthly debts include car payments, house/apartment mortgage/rent, credit card payments, and student loan payments. Additional monthly payments may include child support, alimony, medical bills, etc.
Once you have added all your monthly debt, you will divide this by your total monthly income. Be sure to use your gross income (i.e. your pre-tax income) for this calculation. Your total debts divided by your total monthly income equals your DTI.
For example, if your total monthly debts are $2,000 and your gross monthly income is $4,000, you would calculate your DTI as follows:
2,000/4,000 = .5
Your DTI would be .5 or 50%. That means, each month what you owe is half (50%) of what you earn.
What is the Importance of DTI?
Lenders use your DTI to determine the percentage of available income a potential borrower has each month.
Your DTI is the percentage of money you earn that is not already dedicated to paying regular monthly expenses. The lower your DTI percentage, the more available income you have each month. Lenders generally look for a DTI of 43% to approve a home loan, but this can vary depending on the type of loan as well as other assets the individual may have available.
The DTI helps determine if the individual will be approved for a loan. It also impacts the type of loan for which the individual may be eligible.
Next Steps Not sure if your DTI is where it needs to be to get approved for a home loan? Call a local, licensed loan officer at O Capital Group today - (602) 492-8930. We offer free, no obligation consultations to help you get started on your home buying journey.
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This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.