Knowing your debt-to-income ratio is important when you find your Chapel Hill dream home and are ready to apply for a mortgage.  Your lender will look at it and it will be a major contributing factor to whether you are approved or not.  If you are not familiar with your debt-to-income ratio, below you can learn more about it and how it affects your financing.

Debt-to-income ratio is simply a comparison of the money you earn to the money you owe. It includes credit card debt, existing mortgages, auto loans, and any other personal debt.

Your mortgage lender will look at your Debt-To-Income (DTI) to evaluate your ability to afford your new mortgage. You should have a good idea of what your DTI ratio is before you approach a lender or consider buying a new home.

You ultimately want to achieve a low DTI ratio. A high number obviously means that you have less disposable income and less ability to maintain the home once you purchase it. With foreclosures at an all time high, lenders are not willing to assume any additional risk in lending.

Most lenders seek DTI ratios in the 20-36% range or lower, with no more than 28% of debt dedicated to the mortgage itself. While some lenders will consider higher ratios, DTIs in the upper 30% range are considered high risk.

There are several different calculators home available online to help you determine your ratio, and you can always check with your financial institution for guidance on determining your DTI ratio.

Here’s a simple formula:

  • Add all your monthly payments (mortgage or rent, car, credit cards, any other debt payments)
  • Add your gross income (before taxes), bonuses, alimony, or any other outside income and divide by 12
  • Then divide the total number in (1) by the final number in (2)
  • The result is your DTI ratio

 

If you are either ready to buy a Durham home or are just interested in  your financial health, it is a great idea to know your DTI and understand the steps to lower it and become as close to debt-free as possible!

 

 

**