Why Your DTI Ratio is Important for Mortgage Approval

Estimated reading time: 2 minutes

Your DTI is one of the biggest factors mortgage lenders consider when you apply for home financing. However, many homebuyers don’t fully understand what or how it works. Let’s get you in the best position for approval by exploring what DTI is and why it matters.

What is a DTI Ratio?

Your DTI, or debt-to-income ratio, is a metric used by lenders to determine your ability to pay your monthly mortgage payments. Specifically, they look at how much money you owe (your debts) compared to how much money you earn (your income).

Is There an Ideal Debt-to-Income Ratio?

DTI requirements will be dependent on the loan program. However, lower is better. A low DTI ratio shows that you have a healthy balance between your debt and income. This signals to lenders that your finances are in a good place to handle a monthly mortgage payment. On the inverse, a high ratio may indicate your income doesn’t support the debt you currently hold. This may lead to a higher interest rate to compensate for the additional risk a lender takes on by issuing you a loan.  

How is DTI Calculated?

To calculate your DTI, add up your monthly debt and divide by your gross monthly income. Then multiply the result by 100 to reach a percentage. Expenses like groceries, utilities, gas, or your taxes generally don’t need to be included. Your Loan Originator can also help you accurately calculate yours.

How to Improve Your DTI

Avoid New Debt

As you prepare for the mortgage process, it’s important to avoid taking on new debt. Opening new accounts or making unnecessary purchases can hurt your credit score and drive up your DTI.

Increase Your Income

Another way to lower your DTI is to increase your income. Taking on an extra job like food delivery or ride sharing isn’t feasible for everyone. Perhaps it’s time to negotiate for a raise or ask for a promotion.

One Step Closer to the Closing Table

Knowing what your DTI ratio is and how to keep it low puts you one step closer to home financing success! Ready to jump into the process? Contact us today!