When it comes to getting a mortgage, you may think that your credit score is the most important number. Aside from the financial calculations that makeup your credit score, there’s another number that is key when it comes time for loan approval for a mortgage or even a car loan: debt-to-income (DTI) ratio.
A DTI ratio is one of the ways lenders measure your ability to make payments toward money you’ve borrowed. Your DTI ratio is expressed as a percentage.
It’s a balancing act
A good rule of thumb is the lower your DTI, the better. A DTI less than 50% is generally considered workable in the mortgage industry. However, if your DTI is higher than 50%, you may have a difficult time qualifying for a mortgage. If your DTI is 36% or lower, you’ll be able to borrow more, usually at lower interest rates and other favorable terms.
To calculate your debt-to-income ratio, you add up all your monthly debt payments and divide them by your gross monthly income (the amount of money you earn before taxes).
If you’re in the market for a new mortgage, don’t overlook your DTI. Many people assume that if they have a good credit score and good income, getting a mortgage will be no problem. The fact is that a good DTI also has a huge impact on getting you qualified for a mortgage.
Regarding student loan debt…
As factored into the example above, the median, monthly student loan debt is $203. It can throw your DTI over the edge of becoming a viable mortgage borrower. If that’s the case for you, then do these things before applying for a home loan:
First, wait until the six-month grace period has passed. The six-month grace period after graduation is the absolute worst point in a student loan repayment plan. While you’re waiting, get all your bills in order. It can be the perfect time to work on paying down credit cards and other bills. Even if you have a boatload of student loan debt, paying down other bills can significantly lower that debt-to-income ratio. And that’ll also have the bonus effect of improving your credit score, making you all the more attractive to lenders.
Second, consolidate your student loans if you have more than one, before shopping for a mortgage.
Third, set up an income-based repayment plan, or at least a plan that won’t eat up a huge chunk of your income.
Fourth, consider a deferment or forbearance if you need all the DTI help you can get. These plans allow you to temporarily stop making your federal student loan payments or to temporarily reduce the amount you pay. There are differences between these two things, so do your homework.
Don’t worry too much about your length of job history, or lack there of. Many lenders count your years in college as work history, so long as you’re working at a job that’s consistent with your degree.
Roll through to the rest of my series: “Why Should I Buy a Home vs. Rent?”; “How Can I Afford to Buy a Home?!”; “Show Me the Money to Buy a Home!”; “The Benefits of Buying New-construction Homes vs. Pre-owned”, and “All About Boosting Credit Scores”
“So, who can help me with all of this?”, you may be asking. Someone who specializes in homeownership subsidies and mortgage assistance programs– certified in course training.
Not all Realtors are created equal, a la car mechanics or hair stylists. Many don’t have all the tools in their toolbox. They operate with the only the basic skills of their craft. Many cut corners. Like Realtors® who choose to easily line their pockets by dealing with only flush clientele and high-priced homes.
Think of me as, Gina, your New Home Guru. More Savings. More Living. I am more motivated and able to do a great job to help you affordably own your next home. If you want to own a home in the Austin area, reach out.
Pull the trigger, you’ll be glad you did. I will show you the money!