Applying for a loan on a home requires you to provide your lenders with financial statements that show your financial standing to qualify for loan approval. Your debt-to-income (DTI) ratio is one of the measurements your lender will use to determine how much risk you pose when issuing a loan. It is better for you to have an idea of this figure as part of your own self-assessment before shopping on the market for a new home. That way, you will have a better understanding of how much home you can afford or if you need to work on lowering your total outstanding debts to improve your DTI to get approved on a loan. A debt-to-income ratio calculator provides you with a good starting place to determine your financial standing.
Can I Qualify for a Loan with my Current DTI?
First, it is important to understand how your DTI is calculated and what it reveals about you to your lender. Your DTI ratio is calculated by dividing your monthly debt payments by your monthly gross income. If you have a higher DTI score, the risk associated with issuing the loan is seen as riskier to your lender as there is an increased likelihood of defaulting on your loan. Conversely, if you have a lower DTI, you are more likely to be approved on a loan with better rates and terms due to being perceived as less risky.
Generally speaking, you should aim to have a DTI ratio that is smaller than 36%, with no more than 28% of that debt going towards servicing your mortgage. Some borrowers are willing to go up to a DTI ratio of 43 or even 50% if you have a good financial standing in other areas, like your credit score.
What Inputs Are Needed to Calculate Your Debt-to-Income Ratio?
It’s pretty simple to calculate DTI. The ratio, which is expressed as a percentage, is determined by dividing your monthly income by your outstanding debts. To get started with your DTI Ratio calculator, you will need to be able to input information for the following two variables:
- Gross Monthly Income. Gross monthly income refers to consistent income earned from some form of employment (with a company or self-employed). Consistency is key here as irregular or sporadic income does not show your lender evidence of financial stability. Also included in your gross monthly income are dividends, capital gains, business income, retirement distributions as well as other income.
- Recurring Monthly Debts. This can include things like credit card debt, student loans, auto loans, or any other outstanding debt resulting from consumer or installment debts. The number you should input under recurring monthly debts is how much you pay towards these debts each month.
Let’s take a look at what a DTI ratio of 36% looks like for someone in real numbers.
Let’s say your gross income is $4,200 a month. You would multiply this number by the percentage of debt going towards your monthly mortgage payment, which is calculated at 28%.
$4,200 x 28% = $1,176.
So, you would need to be able to contribute $1,176 of your gross monthly income towards your monthly mortgage payments according to your lender’s evaluation of your DTI ratio.
Does my DTI Ratio Affect my Credit Score?
No. Credit bureaus and agencies aren’t able to look at your income when they score your credit. Without knowing how much money you earn, they are unable to make this calculation. However, credit agencies do analyze your credit utilization ratio or debt-to-credit (DTC) ratio, which compares your outstanding credit card balances to the total amount of credit available to you. The higher your DTC ratio, the better your credit score will be.
How Can I Lower My DTI Ratio?
Lowering your DTI ratio is a pretty straightforward process. You can either lower your monthly recurring debt, or you can increase your gross monthly income. In other words, you can pay off more of your outstanding debts or generate more income. You can also create your own concoction by mixing these two financial record ingredients together to lower your DTI ratio. Although this solution is simple, for some, it is much easier said than done. That is why using a DTI calculator can help you see your financial standing and create a financial plan of action based on the figure you have calculated based on your personal financial information.
How Can The Home Loan Expert Help?
The Home Loan Expert team has spent years getting homeowners the best deal possible on a loan. We will work to meet you at your own unique financial location to review your DTI ratio and other financial records that will impact your eligibility for loan approval.
A DTI ratio calculator gives you the straight numbers, but it can’t provide you with the same human, personalized touch our team of friendly lending experts has to offer. Our team is easily able to relate to you, the client, as we come from the same communities that we serve. Our successful, nationwide expansion, helping homeowners get the best deal on a loan could only be made possible thanks to our
customer-first approach and knowledgeable team. So please give us a call today at (866) 221-1981 to speak with one of our lending service representatives to discuss how your DTI ratio is used to determine your eligibility for approval, which can be done in as little as two weeks. We are also available to chat online during business hours to discuss how much home you can afford according to your current DTI ratio.