When it comes time to apply for a mortgage, your lender first looks at your financial health. They ask for proof of income, review a copy of your credit report, and calculate your debt-to-income (DTI) ratio. To increase your chances of loan approval, it’s important to lower your DTI ratio and improve your financial outlook.
Let’s start by defining and calculating your debt-to-income ratio.
Your DTI ratio is your monthly recurring debt payments versus your gross monthly income. As an example, if you bring in $5,000.00 per month and have a total of $2,000.00 of recurring debt, including your car loan, rent, and credit card balance. To determine your DTI ratio, divide your minimum payment and debts by your monthly income. In this case, you get 0.40, or 40 percent. Generally speaking, you want your DTI ratio to be under 50 percent to allow for some wiggle room to cover other expenses and savings.
Note that your lender will not review all of your bills and obligations. They will want to see your rent or mortgage payments, car loans, student loans, credit card debts, and other monthly obligations, like child support or alimony. It does not include costs like utility bills, home repairs, groceries, daycare expenses, health care/insurance, and car insurance and expenses.
At the Urban Dog Group, we work closely with Michael Dean, loan officer and branch manager at CrossCountry Mortgage in the Orlando area. You can calculate your debt-to-income ratio with this handy calculator available on CrossCountry Mortgage’s website.
Stay tuned next month for a blog post that explores the importance of a strong lender-agent relationship in your house hunting experience!
If you plan to apply for a mortgage soon, consider these four tips to lower your debt-to-income ratio.
1. Pay down your debt.
The easiest way to decrease your DTI is to pay down some debt. If you have a car loan with a monthly payment of $450.00, try to pay extra money towards the principal each month to ultimately pay off your vehicle sooner. Note that your DTI won’t drop until your car loan is paid in full, but this approach will reduce your overall debt faster.
2. Consolidate your debt.
Instead of paying multiple bills each month, combine your bills into a single payment by taking out a personal loan. You can use that loan to pay off your credit card and smaller loans, allowing the monthly payment of your new loan to be lower than the cumulative amount of your old payments. In turn, this effort will lower your DTI.
3. Increase your income.
If time allows, take on a side hustle to boost your monthly income. Note that you’ll need to produce a consistent amount of income for at least two years before lenders will acknowledge your additional revenue stream. Keep this timeline in mind as you plan ahead for buying a new home.
Other options for increasing your income include going after a raise or promotion in your current job or looking for a higher-paying position.
4. Lower the interest on your debt.
You can still decrease your DTI by lowering your monthly payment amounts without reducing the total amount of debt. Explore refinancing your loans to lower your interest rate. Even one or two percent can make a big difference!
Let The Urban Dog Group help you with your real estate needs. Contact Christine Elias at caerealestate@gmail.com.
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