Mortgage lenders want to know you’ll be able to afford monthly payments. To do this, they look at what your debt-to-income ratio (DTI) would be after taking on a mortgage.
The higher your debt-to-income ratio, the less likely you are to be approved for a mortgage; however, most lenders are more forgiving if you have a high credit score. While some lenders will approve mortgages for borrowers with a DTI as high as 43%, in most cases, it’s best to keep your DTI under 36%.
To calculate your DTI, add up all of your recurring monthly debt payments, plus your estimated mortgage payment, and divide it by your gross monthly income (before taxes).
When figuring out how much you pay each month in debt, don’t forget to include:
- Minimum credit card payments
- Student loans
- Auto loans
- Alimony or child support
- Personal loans
- An estimate of your mortgage payment
Let’s look at a few examples, using the average amount of debt in California, to see how to calculate debt-to-income ratio.
Given that the median monthly income in California is $6,273, a typical DTI in the state is 40%.
$2,498 ÷ $6,273 = 40%
Keep in mind your DTI will impact what type of mortgage you can apply for. In most cases, a conventional loan requires an after-mortgage DTI under 36%, a VA loan under 41%, and an FHA loan under 43%. While these rules aren’t set in stone, if your DTI is higher than these benchmarks, you will face more scrutiny during the underwriting process.
Comments (0)