DTI Ratio Information for Home Buyers

People who buy a house with financing must meet the lender’s qualifications to be approved for a mortgage. One typical lender requirement is meeting a specific debt-to-income (DTI) ratio. Knowing what DTI is helps you decide if now is the right time to buy a house. This DTI information for home buyers details what to know about the debt-to-income ratio.

For informational purposes only. Always consult with a licensed mortgage or home loan professional before proceeding with any real estate transaction.

What Is DTI?

The debt-to-income ratio is the total of your monthly debt payments divided by your monthly income to produce a percentage. A high debt-to-income ratio means you use a lot of your monthly income to pay off your debts and have little money leftover for normal expenses and emergencies.

Lenders must balance risk when trying to decide who to lend money to. The DTI ratio is one way they assess your risk. People with a high DTI are more likely to default on their mortgage. Those with a low DTI are low-risk borrowers; not only are they more likely to meet the lender’s qualifications, but they often have access to the lowest available interest rates. A higher DTI doesn’t write you off from being approved, but you might be given higher interest rates.

Each loan program has a different benchmark on what is a “good,” “fair,” and “poor” DTI level, but generally, 35% or less is considered “good.” Many experts recommend aiming for 43% or less.

How Do You Calculate DTI?

Let’s say a home buyer pays $3,000 monthly in debt payments, and their gross monthly income is $7,000. Take $4,000/$7,000=0.428. This amount multiplied by 100 equals 42.8%. The buyer’s debt-to-income ratio is 42.8%.

Fortunately, people can use many debt-to-income ratio calculators to determine their DTI. These calculators help prospective home buyers determine what qualifies as monthly debt to get a fairly accurate picture of their DTI. Anyone wanting to know their DTI can also call a home lender to find out what they classify as recurring debt.

DTI Too High? What You Can Do

Home buyers with high DTI and who still want to buy a house must make changes to reduce their DTI using these strategies. One option home buyers have is to increase their income. For many people, this is not easy to achieve. For households where one spouse does not work, they can quickly increase their income if that person begins working. Lenders do pay attention to employment history, so they may need to stay in their job for several months to get access to better interest rates.

Additionally, prospective borrowers can pay down their debts to work the other end of the calculation. However, for many home buyers, this only makes buying a house more difficult. The money they would use to pay down their debts is the same money they might use to save for a down payment or save for moving costs. For some people who have high DTI, the only option is to pay off debt slowly and save money over some time.

Contact Your Real Estate Professional

If you’re a home buyer with a high DTI, you may still be eligible to buy a home. Contact several reputable lenders and shop for the best home loan deals. Set realistic expectations based on your conversations and design a budget plan to keep working in the DTI while looking for a home. Be a careful shopper and partner with a capable real estate professional to find the house that’s right for you.

For informational purposes only. Always consult with a licensed mortgage or home loan professional before proceeding with any real estate transaction.

Updated January 2024