Lowering Your Debt-to-Income Ratio

Are you familiar with the term “debt-to-income ratio”? Along with your credit score, this is an important factor that mortgage lenders look at when assessing your qualifications.

Simply put, your debt-to-income ratio (DTI) measures your debt payments against your overall income. It is calculated by dividing your total recurring monthly debt by gross monthly income, and is expressed in the form of a percentage. Here is an example:

Susan pays $1,000 every month for her mortgage plus she has a $500 dollar car payment. On top of that, she has other debts that add up to $500.00 a month in payments. Susan’s total recurring debt is 2,000.00 per month. Her monthly gross income is $6,000.00 per month. To figure out Susan’s DTI, you divide 2,000 by 6,0000. This would leave you with a quotient of 0.33, or 33% DTI.

A low DTI Ratio shows that you have a good balance between debt and income. On the other hand, a high DTI can mean that you have too much debt for the amount of income you produce. Mortgage lenders usually consider anything under 35% good, anything above that could use improvement.

How to reduce your debt-to-income Ratio

Thoroughly assessing your financial situation to figuring out your DTI is the first step necessary to lowering it. Once you have done that, you can set a goal and begin the process of lowering your DTI.

Once you’ve found your DTI, you should find something to increase your monthly income. This can be done by picking up a weekend job, asking for a raise, or finding a job with a better salary.

A second option to lower your DTI is to reduce your debt. Paying more on your current monthly debt can help you do this. For example, instead of paying $50 per month on your credit card debt, you can pay $100. This will reduce your overall debt much quicker, but will also temporarily raise your DTI as you pay off the debt.

If you are thinking of buying a home in the near future, consult an experienced mortgage banker to better assess ways to help you achieve a favorable DTI.