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How to Calculate Your Debt-to-Income Ratio


A major benchmark used in qualifying for a home mortgage is a borrower’s Debt-to-Income Ratio, also known as your DTI. Lenders use your credit history and debt-to-income ratio to determine the loan amount you qualify for. 


DTI is calculated by taking all your monthly debt payments from your credit report plus your new anticipated total housing payment (PITI = principal, interest, taxes & insurance)  divided by your monthly gross income.

Certain loan programs offer different qualifying guidelines for expanded debt-to-income ratios. Most programs prefer borrowers to stay in the maximum DTI range of 43-49%, while there is expanded options with some loan programs that allow for an over 50% DTI ratio.

Although, it is important to understand, that DTI typically leaves out monthly expenses such as food, utilities, transportation, health insurance, etc, so you may be approved for a monthly payment higher than you may be comfortable with.  Keep these additional obligations in mind as you evaluate your proposed housing monthly payment. 

Sample Debt to Income Calculation:

Monthly Debts from your credit report:

Car Payment: $325

Student Loan: $350

Credit Card: $100

Proposed Housing Monthly Payments: $1,919

Total Monthly Debts: $ 2,694

Total Monthly Gross Income: $5,400

Debt to Income Ratio= 2694/5,400 = 49.9%


There are a few key ways to help lower your debt-to-income ratio that I recommend. First, avoid taking on any more debt or new creditors. Any new credit taken out, will not only affect your debt-to-income ratio by adding a new monthly expense payment to your DTI, it may also lower your credit score for opening new credit, which could in turn affect qualifying for a loan.  I also recommend to not make any large purchases on credit before settling on your new home. For example, I usually tell my clients to wait until after settlement day to buy new furniture, TVs, cars, etc, unless paying for it in cash. Lastly, if able and with available funds, I recommend examining your monthly debts to see which you could pay down that would best lower your DTI as well as possibly raise your credit score. I am happy to take a look at your credit report and advise exactly what to do to put you in the best financial position for meeting your goals to qualify for a specific mortgage.



For more detail Kevin Berju NMLS #137213 PhillyMortgageTeam@afncorp.com 215-681-3587




Article Written By: Kevin Berju 

American Financial Network NMLS # 137213

Looking for a Lender in Philadelphia? Contact the Philly Mortgage Team. Click below.

 

Kevin Berju starts Philly Mortgage Team with over 25 years in the mortgage industry. Prior to working with residential and commercial mortgages, Kevin graduated with a business degree from Temple University, owned his own business, and worked as an agent for years in both commercial & residential Real Estate. With Kevin’s diverse knowledge of the real estate and mortgage industries, his clients are thoroughly guided throughout their home buying or refinance process. As a result of his knowledge, attention to detail, responsiveness to his clients, and exceptional work ethic, Kevin was awarded the Five Star Mortgage Professional recognition in Philadelphia Magazine for the past successive years as well as reaching the top 1% of all originators country wide since 2012 as designated by Mortgage Executive magazine.

As a mortgage professional for over 2 decades, Kevin is an invaluable resource for both first-time and experienced home buyers. With his accomplishment of the Certified Mortgage Planning Specialist designation, Kevin is placed in an elite group of the top 5% of mortgage professionals in the industry. Looking to Purchase or Refinance in Pennsylvania, New Jersey, or Florida? Kevin Berju is the Lender for You!

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