When you apply for a mortgage to buy a home, there are many factors that your lender will consider before approving your loan. One of the things that lenders think about when they're approving or denying a mortgage is the potential borrower's debt-to-income ratio. Knowing what DTI is, how that impacts your ability to buy a home, and what you can do to improve your debt-to-income ratio can help you through the home buying process.
What Does Debt-to-Income Ratio Mean?
Debt-to-income ratio is the amount of money that a home buyer pays monthly for debts compared to the amount of money they make monthly. Often, this ratio is expressed as a percentage. There are many online calculators that help buyers determine what their DTI is.
Lenders limit the percentage of debt that a buyer is allowed to take on when purchasing a home. If the percentage exceeds a certain amount, the lender will either not approve a mortgage, or will dramatically limit the amount the borrower is approved to borrow, to stay below the maximum threshold of allowable debt.
Why is Debt-to-Income Ratio Important?
Borrowers who have too much debt are more likely to default on their mortgage. Lenders will not loan to borrowers who have too much debt because the risk of lending to that person becomes too great. Borrowers who are on the cusp of having too much debt may need to pay a higher interest rate, and may need to put down more money in order to secure their loan.
How Much Debt Is Too Much?
For many lenders, 43% debt-to-income ratio is the maximum debt threshold, although some lenders will now go as high as 50%. This includes the mortgage debt after the home is purchased. This means that a home buyer with a 43% debt-to-income ratio (not including mortgage expenses) will likely not be approved to borrow money to pay for a home.
What Can You Do to Improve Your DTI?
One way to reduce debt-to-income ratio is by paying down debts. This can take some home buyers months or years, and can also make saving for a down payment very difficult. People who have a hard time paying down their debts often find saving difficult anyway, which can make purchasing a home seem unrealistic. People who want to reduce their debt and save for a home may need help from a financial advisor, who can help them create a budget that will enable them to save and reduce debt.
Another way to improve DTI is by getting a new job with a higher salary. Sometimes reducing debt-to-income ratio is easier for couples. If both people are able to get a new job and if they are able to stick to a strict budget, the act of reducing debt and saving for a down payment can take less time than if a single home buyer is trying to reduce DTI on their own.
Want to Buy a Home? Get Started Today
If you would like to purchase a home and you're concerned about your debt-to-income ratio, start by contacting a lender to find out if you would be qualified for a mortgage. A good lender can help you determine what your debt-to-income ratio is and what needs to be done in order to qualify for a home loan. If you qualify for a home loan, get pre-approved and start contacting real estate professionals. A good real estate agent can help you negotiate a suitable price for an Old Hickory home.