Understanding Debt-to-Income Ratios
Your debt-to-income (DTI) ratio is your total debt owed compared to your income. When you go to apply for a home mortgage, your DTI will be one of the primary factors reviewed. This is why Professional Mortgage Solutions in Rego Park, NY has put together this week’s blog. If you are looking to buy a new home and already have a lot of debt, then read on. We hope you enjoy learning about how you can change your debt-to-income ratio and how it will affect your mortgage rates.
How to Calculate your Debt-to-Income Ratio
A simple way to understand your debt-to-income ratio is to subtract all your monthly debt payments from your total income (prior to tax). Your rent or mortgage payments should be included in the debt calculation, as well as payments for student loans, car loans, credit cards, and any financed items or goods. The DTI will also affect your credit score; in addition, you should look at how high the interest rates are with each type of debt you owe.
Having a High Debt-to-Income Ratio
If you have a high DTI, then you will want to be cautious when opening new debt, including a home mortgage. Most debt is for depreciable assets, such as cars and furniture. However, debt associated with a home usually appreciates as the home gains value. For this reason, a person may be tempted to buy a home when they already have a lot of debt. However, a having larger DTI may mean you will pay a higher interest rate for the mortgage.
Recommended Ratios for Mortgages
The common recommended DTI for a homeowner is 43% or less. This includes front-end costs and back-end costs that you will pay each month to own the home. Take a close look at what your DTI will be before and after you purchase a house. Some programs will permit you to take on more risk, as well.
Other Factors to Evaluate in Your Mortgage Application
Debt-to-income ratio is not the only factor reviewed in your mortgage application. In addition, banks will have higher or lower thresholds for DTI depending on the type of mortgage program, your credit score, and other elements. Here are other things banks will review when approving a mortgage:
- Your total income, including assets and any businesses you own.
- Your credit score.
- Your down payment and sources used as well as the quality of the home that you plan to buy.
Call us today for a Quote
If you are interested in buying a home, contact Professional Mortgage Solutions in Rego Park, NY. We can help you take a closer look at your debt-to-income ratio and let you know more about available homes for purchase in the area.