If you're about to buy a home, you might have to consider getting a loan first. Assessing your finances ahead of time will make it easier for you to be taken seriously by mortgage providers.
So if you're about to get a mortgage, take note that your debt to income ratio will play a big role in getting an approved mortgage application.
First of all, debt to income ratio refers to the percentage of your monthly debt payments and its comparison to your monthly gross income. Gross monthly income is the amount you receive before deductions like taxes are removed. Meaning, if you earn $4k and your monthly debt payments total $2k, your debt to income ratio is 50%. The lower debt to income ratio you have, the better. The highest percentage borrowers can have to get an approved mortgage is typically 43%.
The next thing you need to understand about DTI is that lenders do not consider all debts in calculating it. Some payments are disregarded such as cable, utilities, health insurance premium and phone bills. What lenders consider are loan obligations that are in installment basis such as auto loans, student loans and revolving debts such as credit cards. The only way installment debts are disregarded is if the loan will ideally get paid in the next 10-12 months.
So if not all debts are considered in DTI, it can lead to a question as to which money source is considered an income. In determining a debt to ratio percentage for your mortgage application, any source of income that can be proved will be counted as part of your overall income.
As a conclusion, keep in mind that many lenders prefer to give loans to people with a debt to ratio of 43% and lower. It's always good to assess your own debt to ratio percentage before applying for a mortgage, or better yet ask for an expert's assistance. Preparation for a mortgage application should include lowering your DTI by either increasing your income or lowering your debt.
