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.
