The real estate market is rife with terminology that can make a home purchase seem more than a little complicated. If you’re currently looking for a home and are considering your loan options, you may have even heard the term ‘Debt to Income’ ratio. In the interest of simplifying things, here are some insights on what this term means and how it can impact your home investment.
It’s important to consider what exactly your DTI ratio is before your home purchase as this will quickly determine how much home you can actually afford. To calculate this number, take your monthly debt payments – including any credit card, loan, and mortgage payments – and divide them by your monthly gross income to get a percentage. In the event that your monthly debt is $700 and you make $2800 in income, your DTI is 25%. Want to read more click here
The DTI is a very important number when it comes to a home loan because it enables the bank to determine your financial situation. A DTI of 25% leaves some wiggle room, as most banks will allow a DTI percentage that runs between 36-43%. In the case of the above example, this means that the most debt this person could take on per month is about $1200. While banks vary on this percentage, credit history plays an important part in the DTI that will be allowed.
In the event that you have a DTI ratio that exceeds what your bank will allow, you will need to consider your debts before moving on to investing in a home. If you’re planning on purchasing a home in the next year, it’s a good idea to tackle high-interest debt first. However, if you happen to have a chunk of money saved up that you’re planning on putting into a down payment, it’s worth considering that putting more than 20% down may slightly increase the DTI percentage your bank will accept.