How to Caculate your Dept to Income Ratio (DTI)
People are always asking us about their debt-to-income ratio (DTI).
They know it's important when applying for a mortgage, but many people really don't know what it is, or how it's calculated. Here's what you need to know about your DTI. There are three things that lenders look at to see if you can get approved for a mortgage: income, credit, and assets. Today, we will talk about income. Lenders use your DTI to determine whether you earn enough income to pay back your mortgage. If your DTI is low enough, the loan gets approved. If it isn't, your loan doesn't get approved.
Here's how to calculate your DTI: Add up all the minimum payments that show on your credit report. Add this to your total new housing payment, which includes principal, interest, property taxes, homeowner's insurance, mortgage insurance (if applicable), and HOA fees (if applicable). Divide the total of the minimum payments on your credit report and your housing payment by your gross monthly income (your income before taxes are taken out). The result is your DTI.
It's important to note that the credit reports you can get yourself may not have the same minimum monthly payments that show on the reports that lenders use. That's why it's almost impossible to calculate your DTI by yourself. On the bright side, though, when a lender pulls your credit for a mortgage, it does NOT lower your credit score, so there's no harm in having a mortgage lender pull your credit. So how low does your DTI need to be to get a mortgage? Well, that depends on the type of loan you are applying for. Conventional loans (non-government loans) allow a DTI up to 50%. FHA and VA loans, which are government loans, allow a DTI up to 55%.
Very often, people can get approved for much more than they think. If you want to know how much you can get approved for, give us a call and we can tell you. It's quick, easy, and free. Have any questions about mortgages? Need a pre-approval? Give us a call to see how quick and easy it can be to get a mortgage.