Your DTI (Debt-to-Income) Ratio is Valuable!

Your debt-to-income ratio is a valuable number. Many say it is as important as your credit score. So, what is it? It’s exactly what it sounds like: the amount of debt you have as compared to your overall income. is the amount of money you have left over after paying all your monthly expenses.

What Is Your DTI?

What the bank is trying to ascertain is whether you have enough money left over after paying all your debts each month to afford a mortgage payment; the lower your DTI ratio, the better your chances of getting a loan.

The goal is to have a DTR of 35%. If you are at 50%, most banks will turn you down because, for all intents and purposes, you are living paycheck to paycheck, and a mortgage payment would be too big of a financial risk to the bank. However,  at 35%, you have more than enough to cover the expense of a mortgage.

Calculate Your DTI

How much income do you bring in? That number is easy if you have only one source of income. You don’t count bonuses or gifts or any other irregular income.

1. Look at your regular income and calculate how much you receive every month. Your income can include salary, dividends, Social Security, and retirement income. retirement income.

2. Next, use this equation: Total monthly payment divided by your monthly income. Your debts include amounts that you owe on contract, such as your car payment, credit card payments, student loans, and rent.

You don’t have expenses like utilities that vary from month to month. You also don’t include taxes in your DTI calculation, either for your expenses or for your income. Use your total gross income before taxes.

Improve Your DTI

If you find that your DTI needs improvement (50% or higher) then you will have to work on eliminating your debt and/or increasing your income. Once you improve your DTI then you are ready to buy a home! Here are some suggestions on how to make these improvements.

• Pay all bills on time for one year.
• Paying off debts.
• Refinance your debt (reduce your interest rate).
• Paying down credit cards (closing accounts can hurt your DTI).

The internet is a great source for DTI information as well as some DTI calculators. Here are 2 below to help you out.

• http://financesolutions.org/debt-to-income-ratio-calculator/
• http://www.bankrate.com/calculators/mortgages/ratio-debt-calculator.aspx

Preparing your financial state in order to buy a home can sometimes seem overwhelming; but with careful planning and a little patience, you will be well on your way to getting the keys to your dream home.