Do you wonder if you make enough money to get a mortgage? It’s a common concern, but one that isn’t quite valid in the eyes of most lenders.
Lenders look at your debt-to-income ratio (along with your credit score) to determine if you qualify for a mortgage. You need average to good credit and a solid DTI to get approved for a mortgage. Understanding what a DTI is and how it works will get you on the road to securing your first mortgage.
What is a Debt-to-Income Ratio?
A debt-to-income ratio is a comparison of your monthly debts to your gross monthly income (income before taxes). The higher your DTI is, the riskier the borrower you are in a lender’s eyes.
Lenders use this number to determine your ability to repay the mortgage. The more debts you have compared to your income, the harder it will be for you to keep up with your mortgage payments.
The ideal debt-to-income ratio for most loan programs is 43% or less, but this can vary by lender.
How to Calculate Your Debt-to-Income Ratio
Calculating your debt-to-income ratio is simple, but first, you need a few numbers.
Your total monthly income – Include all sources of income if you have a part-time job or side gig, as long as you’ve had them for at least 2 years and have proof of continuity
Your total monthly debts – Include all debts reported on your credit report, such as minimum credit card payments, car loan, student loan, and personal loan payments.
You don’t have to include costs such as groceries, utilities, or insurance payments – only payments reported on the credit report.
Next, add your potential mortgage payment including the principal, interest, real estate taxes, homeowner’s insurance, and mortgage insurance if applicable.
Divide your total monthly debts by your gross monthly income to get your DTI.
Why your Income Doesn’t Matter (as Much)
You probably wonder why the amount of income you make doesn’t matter. Here’s why.
You could make a little or a lot of money every month, but how much money you have committed from those funds are what matters. No matter how much money you make, you could have every penny you earn already spoken for which would make it much harder to afford your mortgage, paying it on time.
Comparing your income to your monthly debts is a much better tool to determine if you can afford a mortgage payment.
If you’re thinking about securing a mortgage, take a look at your income and your debts together. While you need solid and consistent income to get approved for a mortgage, you also need to prove you haven’t overextended yourself and your DTI ratio is the best way to show this.
Focus on consistent and reliable income, but also focus on paying down your debts to increase your chances of securing the mortgage you need.