How Your Debt-to-Income Ratio Affects Your Home Loan Application
Getting a loan for your home requires a lot of jumping through hoops to get approved. When it comes to your debt-to-income(DTI) ratio your loans may be greatly affected. Your DTI can affect your mortgage amount greatly as well as other aspects of your application.
What Is Debt-To-Income?
Your debt-to-income ratio, or DTI, is the percentage of monthly income devoted to debts, including your future mortgage payment. Too much debt results in a high DTI – and it’s one of the most common reasons for mortgage denial.
DTI Isn’t 100% of the Information
When trying to figure out if you can afford to take on debt you may need to do some other calculations. You may be able to meet the DTI percentage mark set by the bank but after the fact, you may not have enough money to meet basic weekly needs. you’ll want to budget beyond what your DTI labels “affordable.” Aiming below the 36% back-end target is ideal.
Lowering your DTI
The higher the debt the more likely you’ll be rejected on your loan application. There are several ways to avoid being rejected.
- Don’t take on more debt
- Don’t make any recent large purchases
- Pay off as much debt as you can
One of the best things you as a future homebuyer can do is pay off any credit card debt you may have. Doing this will improve the back-end ratio and will also boost your credit score. DTI ratios don’t actually impact your mortgage interest rate, but your credit scores have a big impact on any interest rates.
When Not To Apply
If your debt is already high then avoid applying for a loan until you can widdle it down to a reasonable amount. If your DTI is over 50% then you should probably wait to buy a home until things become more stable financially.
Calculate What You Can Afford
Before you sit down with a lender be sure to calculate what you can afford. This show the lender that you take action and are well informed. This will develop more trust between you and the lender which can affect your application even if it’s just slightly.
When you know what you can afford you know what your options are. If you also know what you want and you see you can’t afford it yet then you now have something to aim for. When you can aim for something you can then set goals for yourself until you reach it.
After calculating what you can afford and determining what your DTI can be you’ll be one step closer in your loan application. Anything that brings you closer to your loan is a step in the right direction.