Debt-to-Income (DTI) ratio is a tool for measuring financial health. Before getting on the market for a new home, it is important to review your finances and ensure that when applying for a mortgage all product options are available to you. Poor financial health can deem applicant’s ineligible for certain product offerings, so prepare your finances in order to have as many mortgage options to choose from as possible. Generally speaking, it is always good to keep a low DTI, as this means you have more money coming into your accounts than going out.
Calculating your DTI
Debt-to-Income ratio is calculated by first totaling your monthly debts. This is any recurring monthly bill, for example rent, utilities, auto loans and insurance. Next divide the total debt by your monthly gross income. This is not your take home pay, but rather the amount listed on paystubs pre-tax and other deductions. Finally, multiply the number by 100 for the final DTI as a percentage.
DTI Ratio’s Significance
So now that you know your DTI, what does this all mean? Well, your Debt-to-Income ratio is important for several reasons. First, it allows you to identify if you’re in good financial standing or if you’ve over-committed yourself financially. Beyond being a great way to perform financial check-ins, the DTI is also used by lenders alongside your credit score to determine if you’re a viable candidate for a loan. A low DTI shows the lender you are fiscally responsible and haven’t leveraged yourself with outrageous expenses. In short, a low DTI versus a high DTI could be the difference between getting approved for your dream home.
To learn more about preparing to purchase a home, visit Evolve’s Homebuyer Resource Page.
