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Balancing Your Expenses: What a Debt-To-Income Ratio Means for a Mortgage

September 8, 2016



One important consideration that a lender takes into account when deciding whether to approve a borrower for a mortgage or a mortgage refinance is their debt-to-income ratio. This small ratio, buried among all the other percentages and numbers in an application, is often a key deciding factor – even more so than credit scores and savings. Yet more than half of consumers say they do not understand what DTI is and how it effects their chances at being approved for home financing.

“DTI is a calculation that weighs personal debt against your monthly income.”

What is DTI?
DTI is a calculation that weighs the payments you make toward your personal debt against your monthly income. For example, if you pay $2,000 a month on your mortgage, $250 a month for an auto loan, and $500 on the rest of your debts, your monthly debt is $2,750. If gross monthly income is $10,000, your debt-to-income ratio is 27.5 percent.

This calculation is broken down into two distinct parts. Front-end DTI involves adding together living expenses and housing costs related to the mortgage. Back-end DTI consists of expenses related to credit cards, auto loans and other bills like cable and telephone. 

What is an ideal DTI?
According to the Consumer Financial Protection Bureau, a 43 percent debt-to-income ratio is considered healthy and acceptable for most home financing. That means that the payments made on your monthly debt and housing costs do not exceed 43 percent of what you make in the same period. This, however, can vary depending on the lender and the loan product: Many lenders look for lower DTI while others may be content with upwards of 50 percent.

Why does DTI matter?
Lenders look carefully at DTI because they want to ensure you are able to make full monthly payments on a mortgage without putting undue financial hardship on yourself. Even if your mortgage payments are the bulk of your monthly debt, paying for housing without being able to save money for a possible medical emergency could be dangerous and result in defaulting on the loan.

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