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Purchasing a home is all about finding a place that feels right, on many fronts. But purchasing a home is also reliant on lending requirements — where key income figures can make or break your ability to get funding for that home of your dreams. One figure that underwriters spend a lot of time analyzing is your debt-to-income ratio as part of the mortgage qualification process. Most mortgage brokers will look for a debt to income ratio around 28 to 33 percent in order for you to qualify for funding.
That means if you’ve got 28 to 33 percent of your income accessible solely for paying housing debt, you’re likely to graduate onto the next phase of underwriting. But your total debt-to-income ratio will also be reviewed, too. Most lenders like your total debt-to-income ratio to be under 43 percent. Because both of these figures can impact your ability to get a home loan, we put together these tips on what you need to know about your personal debt to income ratio.
With so many expenses paid out every month, it can be difficult to get an exact handle on how much you’re spending versus how much you’re banking. Your debt-to-income ratio helps to establish exactly that. It’s a simple math formula: the total of your monthly debt payments divided by your gross monthly income. Usually, it’s the “big ticket” payments that make their way into the formula, like credit card bills, installments paid to auto loans and those larger, scheduled monthly payments.
Put another way, the debt-to-income ratio is the percentage of debt a person carries compared to their income. It’s this debt ratio that’s used by lenders to decide if a person is carrying too much debt and may have trouble making home loan payments.
Dialing in on your DTI is something that you can do on your own — like carefully examining your monthly payouts on a bank statement, for instance. Add up all your payouts, like your current rent or mortgage, and regular payments made to insurance and anything you’re in the process of paying off in monthly installments. Alimony, child support, vehicle leases and student loan payments should also go on that list. But utilities and food expenses usually don’t need to be factored in.
Once you’ve got that total monthly debt number, divide it by your gross monthly income — or the amount you get paid before taxes are taken out. The result will be your DTI. It’s this resulting percentage that becomes a key indicator for your lender. Take a look at the following example:
|
Sample Monthly Debt
|
|
|---|---|
|
Proposed housing debt
|
$ 1,580
|
|
Student loans
|
$ 450
|
|
Credit card debt
|
$ 250
|
|
Monthly financed debts
|
$ 400
|
|
Car payments
|
$ 180
|
|
Any additional monthly payments
|
$ 350
|
|
Total monthly debt:
|
$ 3,210
|
Now add up all the income you receive monthly — remember to use the pre-tax figure.
Total monthly pre-tax income: $7,700
$1,630 ÷ $7,700 = .4169 or a total debt-to-income ratio of 41.69 percent.
Although each lender will weigh your debt-to-income ratio a bit differently, they all generally deny mortgages whose ratios exceed a given limit. Anyone that lands above it will typically not be qualified for a mortgage. Some lenders may be willing to extend that threshold, or the total allowable limit beyond 43 percent — though this is done with strings attached. Lenders may approve the mortgage, but terms and restrictions can apply. Check with your lender to learn about their internal lending requirements.
Even if you’ve got a debt-to-income ratio that’s below 43 percent, there’s no guarantee that you’ll qualify for a mortgage. Many other factors are in play — like your credit rating, work history and other indicators — that can make or break the deal.
When you first decide to start shopping for a home, it’s key to get a handle on your finances. If you find yourself with a less-than-optimal debt-to-income-ratio, there’s no need to panic. Buying a home is a long process, and you’ll need to give yourself space to pay down debt and lower your DTI. With a solid plan and the dedication to stick to it, you can lower your debt and get pre-qualified to buy a home.
After getting your finances in order, you may be in a strong position to start shopping for a home. Congrats on all that hard work! There’s a lot to learn about each phase of the home-purchasing process, so take the time to educate yourself. Our first-time home-buyer’s guide can help educate you on what you’ll need to know.
While you’re making strides towards that big purchase, remember to get in touch with your American Family Insurance agent. They’re your trusted resource that can help you get the coverage your new home needs. And with an easy-to-understand plan in place, you’ll know you’ve got the coverage you need to protect everything that matters most.
Related Topics: At Home , Owning A Home
