Understanding Your Finances When Buying a Home

Understanding Your Finances When Buying a Home

Are you interested in purchasing a home and trying to get a better hold of your financial situation? As you take the steps to begin buying a new home, you will need to begin understanding your debt-to-income ratio, (or DTI), which is one of the most significant ways to get a firm understanding of your financial outlook and to understand if you are ready to afford a property. The loan specialists at Foundation Mortgage can help you calculate your debt-to-income ratio in the areas of Knoxville, Maryville, Lenoir City, Oak Ridge, and Gatlinburg, Tennessee. Read on to learn more about the relationship between buying a home and your debt-to-income ratio.

What Is Debt-to-Income Ratio?

Essentially, a debt-to-income ratio lets lenders know the amount of money you spend compared to your monthly income. If you have a lower debt-to-income ratio, that demonstrates that you have an adequate balance between your income and your debt. If a borrower has a higher DTI, that can indicate that they may have too much debt for the amount of income they earn each month. Lenders will want to ensure that a borrower does not have too many debt payments in correlation to their income. Before providing a mortgage, both banks and lenders will look for a low DTI because borrowers with a low debt-to-income ratio are most likely able to effectively manage their monthly debts. Therefore, if you are looking to buy a home, you will want to keep your debt as low as possible in order to appear as a good candidate for a home loan. The lower the DTI, the better chances you will have of securing a loan.

How Is DTI Calculated?

Debt-to-income measures someone’s monthly debt payments and compares them to their monthly gross income, which is your income before taxes are deducted. To calculate your debt-to-income ratio, first, you will add up all of your monthly payments, including your mortgage, credit cards, student and car loans, etc. Then you will divide that by your gross monthly income, which is the total income you earn every month before taxes. You will receive a decimal amount, which you will then multiply by 100 in order to get your DTI percentage. For example, if your monthly debt is $1,000 and your monthly income is $4,000, your DTI would equal 25%. An ideal debt-to-income ratio for lenders is under 36%. If you are looking to lower your DTI, you can take measures to increase your monthly income, and you can reduce your amount of monthly debt.

Get Help Understanding Your DTI

Lowering your debt-to-income ratio is one step you can take to enhance your chances of getting approved for a home loan in Knoxville, Maryville, Lenoir City, Oak Ridge, and Gatlinburg, Tennessee. Contact Foundation Mortgage today to get help financing your dream home.


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