PROPERTY IS POWER: Understanding your debt-to-income ratio

by Anthony O. Kellum

If you are looking for a home, you might need to finance it using a lender, such as a bank, credit union or a mortgage broker. There are a number of factors that will influence whether your mortgage application is approved. Then, these same factors will play a role in the terms the lender might offer you. One of the most important factors is called the debt-to-income ratio, or DTI. It is important to understand how this will impact your mortgage application.

What is a Debt-to-Income Ratio?

Your DTI is important to the lender because this allows the lender to figure out the likelihood of you paying your mortgage on time. The less debt you have, the more financial stability you have to pay a potential mortgage.

To calculate your debt-to-income ratio, you need to calculate all the bills you have for the upcoming month. For example, if you have rent and a car payment, you add these numbers together. The, you divide this number by your gross monthly income. If you rent is $900 and your car payment $200, your total debt is $1100. Then, if you earn $3300, divide $1100 by $3300. This is about 33 percent.

Student Loan Debt Is a Driving Factor

With many members of the younger generation getting ready to purchase a house, it is important to understand the impact of student loan payments. Because a lot of potential home borrowers have student loans to pay back, their debt-to-income ratios will be significantly higher. This could make it harder for younger borrowers to get qualified for a mortgage, particularly one with favorable terms.

How to Improve Your Mortgage Application

Before you apply for a home loan, you should try to improve your debt-to-income ratio by paying down your existing bills. For example, if you have credit card debt, this will be included in your debt-to-income ratio. Try to pay this down or off before you apply for a mortgage. You should try to pay down your loans as much as possible before applying for a mortgage as well. The less debt you carry, the more likely your mortgage application will be approved.

(Anthony O. Kellum is President of Kellum Mortgage, LLC.)


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