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You’ve probably heard a lot about credit scores and credit reports, but what is a DTI? We believe it is important for customers to understand the mortgage process so they can make informed decisions. That’s why we’re breaking down debt-to-income ratios.
What Is DTI?
Debt-to-income ratio (DTI) is the relationship between your monthly debt payments and your monthly gross income. It gives lenders an idea of your current financial obligations so they can estimate an affordable mortgage payment.
How Do I Calculate My DTI?
Your Loan Officer can help you confirm your debt-to-income ratio when you apply for financing. To estimate your DTI, add your expected monthly mortgage payment to your minimum monthly payments on student loans, personal loans and credit cards. Once you have that number, divide it by your gross monthly income.*
Monthly debt payments ÷ Monthly gross income = DTI
*If your monthly income varies, take the gross income from your last tax return and divide by 12 to get your gross monthly income.
Example of Monthly Debts:
Credit card payment: $75
Car payment: $300
Student loan: payments $125
Expected monthly mortgage payment: $1,000
$1,500 monthly debt payment ÷ $4,000 monthly gross income = 37.5% DTI
Why It Matters
Lower is better. Lenders use DTI to determine eligibility and help find a loan program that is right for you. A lower DTI could give you more financing options.
Most loan programs have specific DTI requirements. For example, you need a DTI of 50% or less to qualify for most FHA loans, USDA loans or VA loans. Jumbo loans and one-time-close construction loans usually have stricter DTI requirements (38%-45%). If you’re not sure whether you’ll qualify for financing, contact your Loan Originator. They’ll be happy to walk you through your options.
Let Us Help!
Knowing your estimated DTI can help you make more informed decisions about your home financing. If you’d like to learn more about the impact of DTI on your loan options, contact your local Loan Originator. They’ll work with you to evaluate your situation and find the loan program that’s right for you.