Understanding DTI: A Mortgage Must-Know

Hey there, it's Josh Jampedro from Home Loan Advisors. Let's talk about DTI, or the debt-to-income ratio, when it comes to getting a mortgage. This is a key factor that lenders consider when determining your loan eligibility. It's essentially a way for them to assess your financial health by comparing your monthly debt payments to your gross monthly income. A lower DTI ratio indicates that you have more disposable income and are less risky to lend to. Typically, lenders prefer a DTI ratio of 43% or lower, but this can vary. As your mortgage advisor, I can help you understand and improve your DTI ratio to increase your chances of securing a mortgage.

Let's talk about DTI, or debt to income ratio.

This is another one of those mortgage acronyms that you'll hear a lot when you're buying a home and you're getting a loan for it. A lot of the mortgage process is based on math. So, things like monthly payment and credit score and loan to value and debt to income ratio, really, this is all just numbers being formatted in different ways to qualify you for your mortgage. So, your debt-to-income ratio is pretty much what it sounds like. It's the number of monthly debts that you have versus your total monthly income. Now, this isn't all of your debts. So, like your cell phone bill, if you're paying for Netflix, for example, or something, that doesn't count towards your debt-to-income ratio. The debt-to-income ratio is based on the monthly payments that report on your credit report. So, if you have a car loan, if you have maybe some medical debts, if you have student loans, if you have another mortgage, those are typically the most common elements that weigh into your DTI.

And it takes your monthly payment for all of those debts combined, plus the mortgage payment on the home that you're buying, and then divides that by your total monthly income. Or your gross monthly income is then divided by the total amount of debts that you're paying. So that is a percentage, right? So let's say, for example, that you have $10,000 a month in gross income. DTI is calculated based on gross income, not your take home pay, but your actual gross that you're paid. If you're paid a salary, let's say, of $10,000 a month. And let's say, for example, you have $5,000 worth of debts. So you've got a Porsche that you're paying $1,000 a month on. You have other debts that all add up to 5000. So you've got $10,000 worth a month in gross income. You've got $5,000 worth of debts. Your DTI, in that case, is 50%. So when you go to get a mortgage now, you have to take the total debts that you're already paying. You have to add the new mortgage payment on top of those debts, and then that is what the lender uses to qualify you for the mortgage. So, typically, what you'll see is that the lender wants to keep all of your debt, everything it reports on your credit report plus the new mortgage payment, into less than 50% of your gross income. Now, it's recommended that you go a little bit lower than that 43% is typically kind of getting up there. You usually don't want to be at 50 unless you have maybe other compensating factors.

If you have other people in the home that are paying part of the mortgage, they're not on the loan. There are certain exceptions to that. But really you want to try to keep that number for sure under 50. Because on most mortgages, conventional loans being one of them, if you go a penny above 50%, you're not qualified anymore. But a healthy mortgage payment and all of your other debts would probably be somewhere in the range of like 38% to 45%. And so that's going to usually be one of the largest factors in qualifying for a mortgage is figuring out how much your gross income is. So, if you're working full time and you're making $100 an hour, you're making, I think, $200,000 a year roughly. So then divide that by twelve, and that is the total amount that you have in income that you can use monthly. And so now the amount of house that you can purchase will depend on how much of the mortgage payment your DTI takes up, plus all of your other debts. And overall, you want to try to keep that number again, probably under 43% if you can. Most loan programs will allow you to go up to 50. FHA, VA can stretch that a little bit further. But usually, you don't want to be in that space where you're worried about a few dollars here or there, make or breaking your loan. You want to try to keep some room there so that you're not house poor, number one. And so also that you qualify for the mortgage.

When it comes to getting a mortgage, understanding your debt-to-income ratio is crucial. Josh Jampedro, branch manager at Home Loan Advisors, knows that this ratio plays a key role in determining your eligibility for a home loan. Your debt-to-income ratio is a measure of how much of your income goes towards paying off debts, and a lower ratio can increase your chances of securing a mortgage with favorable terms. By keeping your debt-to-income ratio in check, you can demonstrate to lenders that you're a responsible borrower, which can ultimately help you achieve your dream of homeownership. Trust Josh Jampedro and his team at Home Loan Advisors to guide you through the mortgage process with expertise and personalized service.