Understanding Debt to Income Ratio
Updated January 1, 1 . AmFam Team
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.
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.
What Is an Acceptable Debt-to-income Ratio for a Mortgage?
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.
How to Lower Your Debt-to-income Ratio
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.
Learn More About Saving and Buying 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 (Opens in a new tab). 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 Articles
- 9 Steps to Create a Home Inventory for Insurance Claims
Your home is more than a roof over your head. It’s where your dreams grow, your family thrives and memories are made. But the possessions you keep inside are important, too.
Whether you’re renting an apartment or own your home, you’ve most likely got an insurance policy designed to protect your dwelling and the things inside. Should the unthinkable happen and you have to use that insurance policy, it’s important to have a plan in place. And a home inventory list is a great way to get started!
We’ll walk you through how to create a home inventory so — in the event of the unexpected — you’ll be more prepared and have a streamlined recovery.
What Is a Home Inventory?
Quite simply, a home inventory is a complete list of all the items, especially valuables, in and around your home. The best home inventories include photos, descriptions and dollar values of each of your belongings. The more detail, the better! It’ll help you provide a comprehensive list to your agent of items lost in the event your home is damaged or destroyed, allowing you to get the most out of your coverage.
When your describing the items in your list, remember that the more information, the better. Here’s a quick reference list of the type of information you should include in your home inventory list:
- An in-depth description of the items. For example, rather than writing down “diamond ring,” be more descriptive, such as: “an emerald cut diamond ring, with white gold shank, accent stones and initials inscribed below the bridge.”
- Make, model, and/or serial number of the items.
- Date of purchase, receipts and photos.
- Estimated replacement cost if you bought it today. Do note that the value of the items might be different today than it was when you first bought them. This is especially true with jewelry, and other valuables.
- Appraisals at time of purchase. Especially if your items were appraised for insurance purposes.
Why Do I Need a Home Inventory?
Whether you’re a homeowner or a renter, everyone can benefit from a home inventory!
If you ever have to make a claim, a home inventory is a great asset to have, especially after stressful events like theft, storm damage or a fire (take a look at how one renter used their home inventory after facing an apartment fire).
When you make a claim, you typically submit information on everything that was lost — which can be difficult to do off the top of your head for all your possessions. Remembering to replace your TV or computer are no-brainers, but when it comes to remembering each piece of jewelry in your jewelry box, things tend to get overlooked. Having a personal property inventory will help, along with knowing how to properly insure your jewelry.
When you have your home inventory checklist, you know exactly what needs to be replaced, and you’ll have peace of mind knowing your entire household is protected.
- Reasons Why a Roof Leaks
You’re admiring the rain from the comfort of your home when you notice a sound — the unmistakable drip of water dropping onto your floor. The first and hardest step is figuring out why your roof is leaking. And with these tips, you’ll find the culprit in no time!
Here’s Why Your Roof Is Leaking
The list of reasons why your roof is leaking may seem long, but don’t worry — when it comes to finding the leak and fixing it, the finding is the hardest part. And the good thing about these problems? They can all be fixed. Check out the list and see what’s troubling your roof:
Your roof is old
Roofs don’t last forever. Protecting your home and everything inside it from the elements comes with a cost. And with all that rain, snow, ice, wind and even sunlight wearing down your roof, it becomes more susceptible to leaks. Every roof will eventually need to be replaced, so learn more about how long your roof should last based on what it’s made of.
- How to Check Your Roof for Storm Damage
There’s no good time to find out your roof needs repair — but you may be able to mitigate that pain by routinely checking your roof for damage after severe weather. Waiting for a leak or damage to present itself gives the problem time to grow and worsen.
And sometimes, you’ll be faced with expensive roof and interior damage repairs if you’re not diligent. By being proactive and checking your roof for damage after severe weather hits can help your roof — and your savings — stay healthy.
