One of the key terms you’ll come across in the mortgage process is Debt-to-Income Ratio. Let’s break down what debt-to-income ratio is, and why it plays a big role in the homebuying process.

What Is Debt-to-Income Ratio?

Your debt-to-income ratio, or DTI, is the percentage of your monthly gross income that goes towards paying off debt, such as credit cards, car loans, and student loans.

In addition, when you apply for a mortgage, the calculation also includes your future monthly mortgage payments.

How is DTI calculated?

Let’s say you make $4,000 a month and you pay:

• $500 on your car loan
• $250 on credit cards
• $1,000 on a mortgage

That’s $1,750 in monthly debt payments.

DTI = ($1,750 ÷ $4,000) x 100 = 43.75%

As a result, you use 43.75% of your income to pay off debt each month. That’s your debt-to-income ratio.

Why Does it Matter?

Your DTI ratio shows how much of your monthly income goes toward debt. It’s one of several factors used to decide if you might qualify for a mortgage.

Generally speaking, a lower DTI suggests you may have more room in your budget for new payments. But keep in mind, DTI is just one part of the bigger picture – things like credit history, income, and overall financial profile also play a big role in the loan approval process.

Final Thoughts:

Understanding your DTI gives you a clear picture of what you can realistically afford. 

Whether you’re just beginning to explore your options, or getting ready to apply, we are here and available to answer any questions or scenarios you may have.

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