An individual or business entity making a loan.
Your debt-to-income ratio (or DTI) will play an important part in mortgages, refinancing and home equity 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 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 or home equity 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 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.
Want to estimate what you would pay each month? Use our mortgage payment calculator