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Debt to Income Ratio Lending

 

In addition to your credit score, your debt-to-income (DTI) ratio is an important part of your overall financial health. 

Lenders use this calculation — along with credit history — to evaluate whether a borrower can repay a loan. Your DTI can also be used to help you consider different ways to handle your debt.

According to nerdwallet.com, lenders look at debt-to-income ratios because research shows borrowers with high DTIs have more trouble making their payments.

Here is a simple way to calculate what your DTI is according to Wells Fargo:

Add up your monthly bills which may include:

  • Monthly rent or house payment
  • Monthly alimony or child support payments
  • Student, auto, and other monthly loan payments
  • Credit card monthly payments (use the minimum payment)
  • Other debts

Then, divide the total by your gross monthly income, which is your income before taxes. The result is your DTI, which will be in the form of a percentage.  The lower the DTI; the less risky you are to lenders.

So what is an ideal DTI?  A DTI ratio of 43% is generally the highest mortgage lenders will accept for a qualified mortgage. 

Is your DTI in check?  Think your ready for the next step to get pre-approved?  This blog entry shows why this step is so vital in the home buying process.

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