When you apply for a loan, one of the most important factors we consider is your debt-to-income (DTI) ratio, which is the percentage found after dividing your monthly debt payment by your gross monthly income. For instance, if you make $3,000 per month and average $1,500 between your credit cards, student loans, and car payment, your DTI is 50%.
While every circumstance is unique, most lenders will tell you that your DTI should be no more than 36%, and ideally, it should be much less. Furthermore, housing costs should not account for more than 28% of your total monthly expenses.
A high DTI indicates that adding a mortgage payment on top of your current debt obligations might become too much of a financial burden. This number does not reflect on your credit score, as credit agencies do not know how much you earn, only how much you owe.
In order to reduce your DTI ratio, you must either decrease your monthly debts or increase your monthly income. Here are some of the quickest and most common ways to accomplish that:
Increase your credit card payments: Try to rearrange your budget so that you have more money to put towards paying off your credit card bill each month.
Avoid large purchases: Rather than charge more to your credit cards, save them for emergencies. This will also allow you to save more for a larger down payment.
Don’t take out new lines of credit: If you can, steer clear of applying for additional loans while you are trying to lower your DTI ratio.
Ask for a raise: Most of us can’t manifest a pay raise out of thin air, but it probably won’t hurt to ask. If homeownership is a short-term goal for you, express this to your supervisor. They might be able to provide insight into your potential career advancement.
Explore side projects: If you have the spare time, you can earn extra money by driving for a ridesharing or food-delivery service. You might also be able to turn your talents for guitar or crafting into extra income via lessons or your very own Etsy shop.
If you’re looking to purchase a home soon but are worried about your DTI ratio, contact a Loan Officer to discuss your unique personal situation. You may have more options than you think!