Calculating Debt-To-Income Ratio

If you are interested in applying for a home loan to help you finance the purchase of your property, some major factors that a mortgage lender will look at to determine your eligibility are your credit and your debt-to-income ratio, or DTI. Your DTI helps to show your likelihood of paying back the money that you borrow, and illustrates a clearer picture of whether or not you can afford loan repayment. If you are interested in buying a home in Knoxville, Maryville, Lenoir City, Oak Ridge, or Gatlinburg, Tennessee, Foundation Mortgage can help. Continue reading to learn more about how your debt-to-income ratio affects the financing of your home.

Debt-To-Income Ratio: Essential Information

scott-graham-5fNmWej4tAA-unsplashA borrower’s debt-to-income ratio essentially illustrates to a lender the amount of money that is spent in comparison to monthly income. If someone has a lower DTI, it demonstrates that they have a sufficient balance between their income and their debt. Having a higher debt-to-income ratio can indicate that a borrower has too much debt compared to the amount of income that they are making. If you are looking to buy a home, you will want to ensure that your debt is as low as possible to show that you are a strong candidate for a home loan. Since lenders want to confirm that a borrower doesn’t have too many debt payments in relation to their income, before they provide a mortgage, banks and lenders will look for a lower DTI because that shows the borrower is more likely to manage their monthly debts effectively.

How To Calculate Debt-To-Income Ratio

Debt-to-income ratio computes your monthly debt payments and compares that amount to your monthly gross income, (your total income before your taxes are deducted). In order to calculate DTI, add up all of your monthly payments, including credit cards, student loan and/or car payments, your mortgage payment, etc. That amount is then divided by your gross monthly income. This will result in a decimal amount which is multiplied by 100 in order to get a debt-to-income percentage. For instance, if your monthly debt amounts to $2,000 and your monthly income is $5,000, your DTI would be 40%. Lenders typically like to see a DTI of 36% or less. If you are trying to decrease your DTI, there are certain measures you can take to help reduce your amount of monthly debt as well as increase your monthly income.

Understanding Your DTI When Buying A Home

If you are ready to buy a home in Knoxville, Maryville, Lenoir City, Oak Ridge, or Gatlinburg, Tennessee, lowering your DTI is one step you can take to help you qualify for a mortgage. Contact Foundation Mortgage today with any questions about your financing options.

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