WHAT IS DEBT-TO-INCOME RATIO?
When you are starting the home buying process, most real estate agents will ask if you have been pre-approved with a lender. This is very important because having a pre-approval letter in hand when you are ready to write an offer on a home tells the seller that you ARE A SERIOUS BUYER!
One of the things that a lender will look at when considering your pre-approval is your Debt to Income Ration. You may even here them say the term 'your DTI" What is this? Debt to income ratio is all of your monthly debt payments divided by your gross monthly income. This number helps your lender determine your ability to make payments based off of what you actually bring home.
WHAT IS A GOOD DTI?
Lenders look at this ratio when they are trying to decide whether to lend you money or extend credit. A low DTI shows you have a good balance between debt and income. As you might guess, lenders like this number to be low -- generally you'll want to keep it below 36, but the lower it is, the greater the chance you will be able to get the loans or credit you seek. The type of loan you are using will also have different standards of DTI. Make sure that you ask your lender what your loan requirements are when it comes to your DTI.
CALCULATING YOUR DEBT TO INCOME
You add up all your monthly debt payments and divide them by your gross monthly income. Your gross monthly income is generally the amount of money you have earned before your taxes and other deductions are taken out. For example, if you pay $1500 a month for your mortgage and another $100 a month for an auto loan and $400 a month for the rest of your debts, your monthly debt payments are $2000. ($1500 + $100 + $400 = $2,000.) If your gross monthly income is $6000, then your debt-to-income ratio is 33 percent. ($2000 is 33% of $6000.)