Debt To Income Ratio for Home Loan Approval

What is a mortgage anyway?

A mortgage is another word for a home loan. When you get approved for a mortgage or loan, your lender will use the home as collateral. There will be a lien on the property’s title until you pay off the loan, at which point they will give you the title to the home. Similar to a car purchase. It's always best to put as much money as you can as a down payment on the home. More money down will usually help you achieve the best interest rate and monthly payment. The length of time you have to pay off your home is usually a maximum of 30 years. It can vary depending on your lender, some accept only 15 or 20 year terms. It's best to always confirm this before choosing a lender.

DEBT TO INCOME RATIO

Debt to income ratio (DTI) is the percentage of a consumer's monthly gross income that goes toward paying their monthly debts.

DTI ratio is divided into two categories. One is the front-end ratio, also called the housing ratio and it shows what percentage of your income would go toward your housing expenses, including your monthly mortgage payment, real estate taxes, home insurance and HOA dues. The second is called the back-end ratio shows what portion of your income is needed to cover all of your monthly debt obligations. This includes your credit cards, car payments, child support, student loans,etc. plus your housing expenses or front-end ratio. Your total monthly debt should not exceed 36% of your monthly income in most cases. The below online example should explain how a consumer should calculate their ratios:

To determine your DTI ratio, simply take your total debt figure and divide it by your income. For instance, if your debt costs $2,000 per month and your monthly income equals $6,000, your DTI is $2,000 ÷ $6,000, or 33 percent.

Keeping your DTI as low as possible will help you when applying for a home loan. You want to prove to the lender that you are worth the obligation of home ownership. The lender needs to know that you are a low risk consumer when it comes to defaulting on your loan payments. You as a consumer should also be careful about adding on more "weight" than you can carry. Do not add on more debt than you are comfortable with paying back. If you already owe hundreds of thousands in student loan debt, for example, do not try to add on more hundreds of thousands in real estate. Give yourself time to pay some of your debts off so you do not regret it later. More debt obligations lead to stress and low quality of life, and that my friends is NOT worth it. In other words, make sure the timing is perfect when you decide on becoming a home owner.

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