Buying A House? What You Need to Know About the Debt-to-Income Ratio
Debt-to-income ratio is an important factor to consider when trying to buy a home and obtaining a mortgage. A person's debt-to-income (DTI) ratio can affect their ability to qualify for a mortgage. People who have a high DTI may not be able to get a large mortgage, or may not be able to get a mortgage at all. Knowing the DTI threshold and what can be done to reduce the DTI ratio can help home buyers to get the home they want.
What Is Debt-to-Income Ratio
Debt-to-income ratio is the amount that a home buyer makes every month versus the amount that they pay in debts every month. A buyer who wants to get a mortgage cannot pay more than 43% of their income to their debts, including the cost of their mortgage. In other words, most lenders will not approve a mortgage to a borrower if the loan will push their DTI ratio over 43%.
This line has been drawn in the sand because people who have a debt-to-income ratio higher than 43% are more likely to default on their mortgage payments. Some lenders will approve a higher debt-to-income ratio, but these mortgages can be hard to find. Sometimes borrowers to go over the 43% ratio must get a qualified mortgage.
How to Calculate Debt-to-Income Ratio
When calculating debt to income ratio, the buyer must add up all of their debts. If the buyer pays $500 in debts every month, and makes $2,500 per month, this means the buyer has a 20% DTI.
Why Debt-to-Income Ratio Matters
Lenders are always deciding whether or not to loan money to a borrower based on the amount of risk. A buyer who owes a lot of money to other lenders is more likely to default on their mortgage when compared to a person who does not owe much money to other lenders. Lenders must do their best to reduce risk, which is why they're always looking for borrowers with lower DTI.
What You Can Do If Your Debt-to-Income Ratio Is Too High
If the debt-to-income ratio is too high, the best way to take care of this problem is to lower the monthly payments. Sometimes this can be done without decreasing the debt, although the ideal situation would involve reducing the actual amount of debt. Refinancing the loan to a lower interest rate and smaller monthly payments may be able to help the buyer reduce their debt-to-income ratio to a manageable amount.
If refinancing is not a possibility, the home buyer may need to increase their monthly income in order to get a mortgage. By getting a raise or a second job, the buyer can potentially lower their debt-to-income ratio to an amount that makes the lender feel comfortable. If the house is being purchased by a couple and one person in the couple is not working, it may be easy for the non-working person in the couple to get a job.
If you're a Redondo Beach home buyer who would like to get a mortgage but your debt-to-income ratio is high, talk to a lender to decide what your next steps should be. Your lender can help you decide whether or not your debt-to-income ratio is too high to get a mortgage, and if so, what you can do about the problem. Working with a lender early in the process can help you get the assistance you need.