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How Debt-to-Income Ratio Affects Mortgages

Richard Clayton Aug 6, 2019
Your debt-to-income ratio (DTI) helps lenders decide whether to approve your mortgage application. It’s the percentage of your income that goes toward paying your monthly debts, and it helps lenders decide how much you can borrow. Generally, the lower your debt-to-income ratio is, the more likely you are to qualify for a mortgage.
Your lender will do a simple calculation, looking at your monthly debts as well as your monthly income sources, which will show your debt percentage. Your DTI plays a large role in whether you’re ready and able to qualify for a mortgage.
It’s the percentage of your income that goes toward paying your monthly debts, and it helps lenders decide how much you can borrow.
Your front-end ratio reveals how much of your pretax income would go toward a mortgage payment. Lenders tend to prefer that your front-end DTI ratio does not exceed 28%.
To help determine if you can afford a mortgage loan, a lender may calculate your back-end DTI ratio, which shows how all of your debts, including your existing debts with a mortgage payment added in, compare to your pretax income.
If the number is too high, it could indicate that you may not have enough income to pay both your debts and day-to-day expenses.
If your DTI is too high, there are ways you can lower it. First and foremost, avoid taking out more debt. Ask for a raise at work, or get a second job, to boost your income. Try to pay off as much of your current debt as possible. Finally, don’t make any big purchases before buying a home.
If your debt-to-income ratio is exceptionally high, ie. 50% or more, you may want to wait to make a home purchase.
If the traditional route to homeownership is not an option, right now, there is an alternative, houses near me to rent to own, which is an agreement, in which you rent a home for a certain amount of time, with the option to buy it before the lease expires.
This gives you the best option if you’re an aspiring homeowner but aren’t quite ready, financially speaking.
There are ways to get approved for a mortgage, even with a high debt-to-income ratio: Try a more forgiving program, such as an FHA, USDA, or VA loan. Restructure your debts.
Try paying down the right accounts, meaning, if you can pay an installment loan down so that there are fewer than ten payments left, mortgage lenders usually drop that payment from your ratios.
Another way to get approved for a mortgage, you can add a co-signer. A co-signer does not directly improve your DTI percentage. However, a co-signer does reduce the overall risk you present to the lender.
The best way to get a personal loan with a high debt-to-income (DTI) ratio is to work with a specialty lender that operates online. The company you turn to matters.
The lender most likely to approve a request specializes in working with borrowers struggling under a mountain of bills. These lenders focus more on your ability to repay the obligation after restructuring all of your bills into a single payment that is more affordable.