Real Estate Terms: ‘Debt to Income’ Ratio and How It Affects Your Home Purchase

The real estate market is full of terminology that can make a home purchase or refinance seem more than a little complicated. If you are currently looking for a home and are considering your loan options you may have heard the term debt to Income ratio. In the interest of simplification, here are a few insights on this term and how it can impact your investment.

Determining Your ‘Debt to Income (DTI)’ Ratio

It is important to consider what exactly your debt to income ratio is before your home purchase as this will determine how much you can afford. Calculating your debt to income is fairly simple. Begin with your monthly debt payments, including any credit dcard, loan and mortgage payments. Divide by your monthly gross income to get a percentage. In the event that your monthly debt is $700 and you make $2800 in income, your debt to income ratio is 25%.

What Your Debt to Income Ratio Means To The Bank

The DTI is a very important number when it comes to a home loan because it enables the bank to determine your financial situation. A DTI of 25% leaves some room as most banks will allow for a DTI percentage that runs between 36-43%. In the case of the above example, this means that the most debt this person could take on per month is about $1200. While banks vary on this percentage, credit history also plays an important part in the DTI that will be allowed.

Paying Down Your Debt Or Purchasing A Home

In the event that you have a DTI ratio that exceeds what your bank will allow, you will need to consider your debts before moving on to investing in a home. If you’re planning on purchasing a home in the next year, it’s a good idea to tackle high-interest debt first. However if you happen to have money saved up that you’re planning using for a down payment, it’s worth considering that putting more than 20% down may slightly increase the DTI percentage your bank will accept.

Contact me direct today at 303.668.3350 and I would be happy to assist you with your home loan prequalification at which time we will calculate your debt to income ratio.

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