Buying a Home? What You Need to Know About the Debt-to-Income Ratio
Debt-to-income ratio is an important concept that home buyers must familiarize themselves with when the time comes to buy a home. A home buyer with too much debt may not be able to get a loan and therefore may be unable to buy a home. Knowing what debt-to-income ratio is and how it affects the home buying process and obtaining a mortgage can help the home buyer to get a loan.
Debt-to-Income Ratio Defined
Debt-to-income ratio (also called DTI) is the amount paid towards debts compared to the amount earned in a single month. Debt-to-income ratio becomes important during the home buying process because lenders will not loan money to buyers who have too much debt. There are a variety of debt-to-income ratio calculators online that help buyers determine how much debt they have.
When Debt is Too Much
Almost everyone has some amount of debt. Some have car loan debt, others have credit card debt or student loans. Debt is a part of normal life for many households. However, too much debt can be a liability when trying to buy a home. As a general rule, lenders say that the debt-to-income ratio is too high if the buyer's original debt plus the debt from the mortgage goes over 43%. If a mortgage will push the buyer's DTI over 43%, then the mortgage will likely not be approved.
Why Debt-to-Income Ratio Matters
Debt-to-income ratio matters because buyers with high debt-to-income ratios are more likely to default on their mortgage when compared to buyers who have low debt-to-income ratios. Lenders try to avoid making high-risk loans, so one of the ways they do this is by limiting the debt-to-income ratio that a home buyer is allowed to have.
How to Lower Your Debt-to-Income Ratio
There are many things that a borrower can do to lower their debt-to-income ratio. Paying down the debt is one way to do this, but for many buyers, paying down debt will either take too long or spend resources that are needed to purchase and move into a home. If paying down the debt is not an option, there may be others.
For example, increasing monthly income is one way to decrease the debt-to-income ratio. A Piperton TN home buyer who gets a new job or a promotion may be able to lower their debt-to-income ratio enough that they're able to buy a house without paying off any debt. Another way for a home buyer to lower their debt-to-income ratio is by refinancing existing debt. Consolidating loans is a common way that home buyers lower their DTI without actually reducing the amount of debt they have. Buyers who are interested in these options can work with a lender and an accountant to determine what can be done to lower their DTI.
Contact Your Lender to Get Started
Home buyers who want to get started purchasing a home can do so by contacting their lender. A lender can help a home buyer determine whether or not they have too much debt, and if they do, what they can do to make buying a home possible.
If you're a home buyer, contact your lender to get started processing your loan. Your lender can answer your questions about debt-to-income ratio.