Debt to Income Ratio Explained
One of the most important factors for first-time homebuyers to get approved for a home is their debt to income ratio.
Debt to income ratio is a financial measure that compares the amount of debt that you have compared to your overall income. To determine your DTI ratio, simply take your total debt figure and divide it by your income. For example, if your monthly debt is 2000 and you make 5,000 a month then your DTI would be 2000/5000 or 40%.
Mortgage lenders use your DTI to determine how much you can afford for a house. They typically use the 28/36 rule to determine this. According to the rule, a buyer should only use 28% or less of their gross monthly income on housing expenses, and 36% or less of their monthly income on all of their debt. If you have a high DTI lenders will more than likely deny your loan application because your debt is too high compared to your income.
There are three main ways to get a better DTI ratio
1. Increase your gross monthly income either by getting a raise or side hustle
2. Decrease your recurring monthly debt by cutting on necessary expenses
3. Create a budget to make sure not to spend more than what you can afford
Buying a home is the biggest investment you’ll ever make. So, before you start looking, make sure to calculate your DTI ratio and check if you’re ready to buy a home.