Homebuying November 23 2017

Defining Your DTI Ratio

Do you know your debt-to-income (DTI) ratio? If you’re getting ready to apply for a mortgage, it could come in handy. Lenders use your DTI ratio to assess how credit-worthy you are, so familiarizing yourself with it can help you prepare your finances for the lending process.

What is the debt-to-income ratio?

The debt-to-income ratio compares the amount of debt you have with your overall income. Lenders usually couple your DTI ratio with your credit score determine how much money you can afford to borrow. A high DTI ratio signals to lenders that you cannot afford to make monthly payments, as your debt takes up a significant portion of your monthly income. When you’re applying for a mortgage, the lower your DTI, the better.

Calculating the Ratio

Computing your debt-to-income ratio is simple:  

Total Monthly Recurring Debt

÷

Gross Monthly Income

  If you make a high amount of income or have a small amount of debt, you will have a lower ratio. If the opposite is true, your DTI will be high. Calculating your debt-to-income ratio before applying for a mortgage loan will help you know whether your lender will be willing to let you borrow—it can even help you determine if you’re financially ready to borrow.

The Two Types of DTI

Front-end DTI

Front-end DTI considers only your housing costs, such as a mortgage payment, rent payment, or mortgage insurance. If you make $5,000 a month, and you have a monthly mortgage payment of $1,250, your front-end DTI ratio is 25 percent. Even if you have other monthly debt obligations, like a car payment or a student loan, your front-end DTI will remain the same, as it only accounts for housing costs.

Back-End DTI

Back-End DTI takes all of your recurring debt payments into consideration. If we use the above example, and you have an additional $750 in monthly debt payments, your back-end DTI is 40 percent. This number dwarfs your 25 percent front-end DTI. When you calculate your debt-to-income ratio, bear both of these ratios in mind. Your lender might use either one to assess your ability to make monthly mortgage payments.

The 43 Percent Rule

In most cases, a 43 percent debt-to-income ratio is the limit for borrowing and getting a Qualified Mortgage (exceptions are sometimes made for smaller lenders). Qualified Mortgages have features that make sure you can actually afford your loan. The 43 Percent Rule is the hard ceiling, but experts recommend that you keep your ratio lower than 36 percent, with a front-end DTI of no more than 28 percent. To bring your ratio down to these levels, you have two options: bring in more income or pay off debt. Either one will tip the scales in your favor. Now that you know what your debt-to-income ratio is, how to calculate it, and the difference between front-end and back-end DTI, you are equipped to prepare yourself for a loan application. Recognizing lenders’ debt-to-income parameters—and understanding what lowers your ratio—will empower you to optimize your finances and qualify for a loan.  

Still have questions?

Speak to a Loan Officer today!

Sources Consumer Financial Protection Bureau Investopedia Bankrate

Search Results for query

September 10 2018

Understanding Title Insurance

Buying a home can be an anxious, emotional, and stressful time for many people. Understanding owner’s title insurance and why it’s important can help. Each year, more than 80 percent of homebuyers choose to purchase owner’s title insurance....

Read More

September 06 2018

How to Make Your Home More Salable

In the housing market, supply often exceeds demand and most people can generally sell a house faster by lowering the price. But there are other ways to improve your home's attractiveness without lowering the asking price. If you're looking to sell your...

Read More

September 04 2018

Alexa Commands You Can Use Every Day

If you’ve brought Amazon Alexa into your home, here are the coolest and most useful skills and Alexa commands you can use every day!

Read More

August 31 2018

Notarize and Eagle Home Mortgage Join Forces to Complete a Fully-Digital Mortgage Closing in Texas

Notarize, the first digital platform to offer a fully-online closing experience, and Eagle Home Mortgage, a full-service mortgage lender, announced the execution of a fully-digital mortgage closing in Kyle, Texas, for a Lennar homebuyer.

Read More

August 30 2018

Eagle Home Mortgage Hosts Back-To-School Drive for Local Foster Children

Eagle Home Mortgage hosts Back-To-School Drive and raises $2,327 in donations for Treehouse Wearhouse, in an effort to help local foster children in the greater Seattle area.

Read More

August 27 2018

Eagle’s Guide to the Cost of Living in America

Read about how the cost of living in America affects your ability to purchase a home and follow our tips to combat these trends.

Read More

August 24 2018

The Ultimate Home Seller’s Checklist

Your house is sold. What next? Eagle Home Mortgage has prepared your closing checklist as you reach the end of the home buying process. Services Gather your receipted bills for taxes, water, sewer and civic association dues and fees. This will ensure you...

Read More

August 22 2018

20 Tips for Your Next Yard Sale

By the time anyone is ready for a yard sale, they’ve been accruing clutter for years. Most yard sales end up being a last-minute mish-mash of junk, yielding no profit. To avoid spending fruitless hours in the hot sun, here are 20 tips on how to manage a...

Read More

August 21 2018

How To Start Planning for Retirement in Your 20's

Read about how you can start planning for retirement, even as early as your 20's. A healthy budget makes for a healthy retirement!

Read More

First34567Last

Mortgage Calculators

Crunch the Numbers With Our Helpful Mortgage Calculators

Payment Calculator

payment calculator

Payment
Calculator

Affordability Calculator

affordability calculator

Affordability
Calculator

Refinance Calculator

refinance calculator

Refinance
Calculator

The Modern Digital Mortgage with a Personal Touch

Paperless. Effortless. Awesomeness TM

Simplify the home financing process with our Digital Mortgage. We'll be here to help navigate you through the entire process.

Get Pre-qualifiedWhat is a Digital Mortgage?