An individual or business entity making a loan.
Your Glossary_Term: debt-to-income ratio (or DTI) will play an important part in Glossary_Term: mortgages, Glossary_Term: refinancing and Glossary_Term: home equity loans or Glossary_Term: lines of credit. But what is it exactly? Simply put, it is the percentage of your monthly income that is taken up by your monthly Glossary_Term: debt payments.
Lenders calculate your debt-to-income ratio by using these steps:
For example, if your monthly income is $5,000 and your monthly debts plus your monthly projected mortgage, home equity loan or line of credit payments are $1,000, your debt-to-income ratio would be 20%.
If your DTI ratio is too high, consider how you can lower it. You might be able to pay down your credit cards or reduce other monthly debts. If the proceeds from your current home’s sale plus your savings allow it, you may also want to increase the amount of your down payment, in order to lower the projected Glossary_Term: monthly mortgage payment. Or you may want to consider a less expensive home.
Also keep in mind that there are alternative sources of income. Some lenders may consider other non-traditional sources of income (for example, trust income or housing allowance) in addition to your traditional income. Be sure to ask your lender about the availability of mortgage products and programs that allow the use of non-traditional sources of income.
By understanding what your debt picture looks like, you can develop a plan to tackle it.