If you're applying for a mortgage to buy a home in Berks County, you'll see the term debt-to-income ratio a lot. It's also referred to as DTI.
This is the ratio between your monthly debt payments and your gross monthly income.
In order to determine if a loan can be repaid, lenders look at your DTI and credit history. DTI requirements vary from lender to lender.
How to Calculate Your DTI
Lenders want to see a low DTI because it shows them that you're likely to be able to pay your mortgage on time.
Low debt-to-income ratios indicate a healthy balance between your debts and income. You have a higher chance of getting a loan or line of credit if this percentage is lower.
When you have a high debt-to-income ratio, it can indicate to lenders that your debt level is already too high. This could be a sign you should avoid taking on further financial obligations.
In order to calculate your DTI, you need to add all of your recurring monthly obligations together. Among these obligations are mortgages and student loans, car loans, credit card payments, and child support. Divide that number by your gross monthly income.
Your gross monthly income is the amount you earn every month before taxes and deductions.
How Does DTI Affect Getting a Mortgage?
When you apply for a mortgage, lenders want a comprehensive picture of your financial situation. They'll use your DTI primarily to decide whether to approve you and how much you can afford to pay for a house.
Lenders also look at your credit history, your money for a down payment, and your gross monthly income.
What DTI Does a Lender Want to See?
The DTI ratio for most lenders is less than 36%, though every lender is different. You are expected to devote no more than 28% of your debt to servicing your mortgage.
According to lenders, if you earn $5,000 a month, you can put down a maximum of $1,400 toward mortgage payments each month.
A lender will also assess your total debts, which should not be more than 36%. If you make $5,000 a month, that is approximately $1,800.
In most cases, 43% is the highest ratio you can have and still qualify for a mortgage. If you have a number over that, your lender is likely to deny your application as your expenses will be seen as too high in comparison to your income.
Debt-to-income ratios don't affect your credit score, and income is not included in credit-reporting companies' calculations.
Your credit score is calculated based on another ratio - credit utilization. This is how much credit you use in comparison to your credit limit.
Credit reporting agencies have access to your credit limits on individual cards as well as your total credit limit. Balances on your credit cards should not exceed 30% of your credit limit. The lower the balance, the better.
You can use your DTI to find out how you manage your debt and if you have too much. A debt-to-income ratio of less than 36% indicates a manageable debt load compared to your income, and you should be able to obtain new credit lines based on this factor.
Lenders may be reluctant to lend you money if your DTI is between 36%-42%. In the case of DTIs of 43%-50%, creditors might deny your application. Prior to applying for a mortgage, you should concentrate on paying off the debt.
If your DTI is higher than 50%, you might consider debt relief options.
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