What Is a Good DTI for a Mortgage?

What Is a Good DTI for a Mortgage?

If you've poked around the internet searching for information on getting a mortgage, you've likely asked yourself, "what is a good DTI for a mortgage, anyway?"

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Allow me to answer – but first, we should define your DTI and why it's important.

DTI stands for debt-to-income ratio. It's the percentage of your gross monthly income that goes towards debt.

Your DTI is an important indicator of overall financial health and helps determine the risk associated with extending a loan to you. The general rule of thumb is that the lower your DTI ratio is, the better the chances are that you’ll get approved. A low DTI demonstrates a healthy balance of income to debt, and to the lender this can indicate you know how to manage your finances wisely. While you won’t be required to calculate your own DTI, I want to empower you with knowledge of the basics.

WHY LENDERS CARE ABOUT YOUR DTI FOR A MORTGAGE

Your DTI tells lenders how much money you'll have at the end of the month to pay back the mortgage they've extended to you. Needless to say, it's a very important number. A DTI of 43% is typically the highest ratio a borrower can have and still get qualified for a mortgage, but lenders typically look for ratios of 36% or less (including your mortgage payment). In some cases, certain loan programs may allow for higher DTI ratios, depending on what the individual qualifies for. A high DTI can mean you are overextended and would be less likely to repay the mortgage debt.

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In fact, WellsFargo defines DTI ratios as:

• 35% or less: Looking good, debt is at a manageable level.
• 36%-49%: Opportunity to improve.
• 50% or more: Take action! Not much is left to save or spend.

Put yourself in your mortgage lender's shoes. Would you lend a $350,000 home loan to someone who only has $1,000 left at the end of the month? Probably not.

Knowing your DTI is an important step to qualifying for a mortgage, and the good news is that it's easy to calculate. Let's try it out next.

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TIP: As a homeowner, consider maintaining a DTI of 28-35% including your mortgage.

HERE'S HOW TO CALCULATE (AND LOWER) YOUR DTI FOR A MORTGAGE

Let's use an example to go through the steps of calculating your DTI. Keep in mind that you should only include minimum payments due every month.

Step 1: Add up all your monthly payments

• Rent or mortgage payments = $900
• Major & store credit card payments = $100
• Auto & other personal loans = $500
• Court-ordered payments, if applicable = N/A
• Student loan payments = $250
• HOA fees, if applicable = N/A

That leaves us with a total of $1,750 in current monthly payments.

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Be sure to omit any expenses that vary in balances due, such as:

• Utility bills (e.g., heat, electricity, gas, water, etc.)
• Contributions to your 401(k) or IRA plan
• Health insurance expenses
• Transportation-related expenses

Next, add your pre-taxable annual income. Let's say you make $4,500 before taxes.

Now, divide your pre-taxable monthly income by your total monthly expenses.

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That would be $1,750 divided by $4,500 for a DTI of 39%.

And there you have it. It's that simple!

Remember, your DTI isn't set in stone. You can reduce your DTI by reducing monthly debt payments (see my previous blog on credit-building strategies) or increasing gross monthly income. Doing so should improve your chances of getting approved for a mortgage.

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TIP: DTI is not the only factor considered when applying for a mortgage. Lenders will also look at your overall credit scenario and credit score.

SO, WHAT IS A GOOD DTI FOR A MORTGAGE?

Your DTI is one of several important factors that lenders consider when evaluating your mortgage application. DTI limits vary from lender to lender, but typically 43% is the highest. Ideally, keeping your DTI lower than 36%, with no more than 28% going to mortgage or rent, will put you in the best position to get approved. A lower DTI is more favorable to the lender as it shows you know how to manage your finances well.

Interested in learning more about managing your debt so that you can become a successful homeowner? Get in touch with me today to have me look over your financial situation. A home of your own could be closer than you think!

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