How Debt-to-Income Ratio Affects Your Mortgage Application

Dated: September 5 2022

Views: 10

Data from PEW research shows that 67% of Americans apply for a mortgage to buy a home. Applying for a mortgage is a long and detailed process, and one of the most important factors that lenders look at is your debt-to-income (DTI) ratio. But what is DTI, and how does it affect your mortgage application?

Understanding DTI Ratio

Your DTI ratio is the amount of debt you have divided by your gross monthly income. For example, if you have $500 in monthly debts and a gross monthly income of $2,500, your DTI would be 20%.

A high DTI ratio means that most of your income goes towards debts, which can make it difficult to afford other expenses, let alone save for a down payment on a home. A low DTI ratio indicates that you have more disposable income and are in a better position to take on new debt.

DTI and Mortgage Application

Most lenders like to see a DTI ratio of 36% or less. This means that no more than 36% of your monthly income is spent on debt payments. If your DTI ratio is higher than this, it signals to the lender that you're not in a good financial position to make monthly mortgage payments. As a result, they will deny you the mortgage or charge you a high interest rate because you're a high-risk borrower.

How to Improve Your Debt-to-Income Ratio

Because having a low DTI ratio is important, you need to make sure that it's as low as possible before applying for a mortgage. Here are a few things you can do to improve it:

  1. Pay off existing debt to reduce the amount of monthly income that goes towards debt payments.

  2. Try to increase your income to lower the DTI ratio by applying for a promotion or a raise at work. You can also find a part-time job or start a side business.

  3. If you can't pay off your debt outright, try to at least make smaller monthly payments. This will lower the amount of interest you pay per month and free up more of your income to put towards other expenses.

  4. If you have high-interest debt, such as credit card debt, you may be able to save money by refinancing to a lower interest rate. This will lower your monthly payments and help pay off your debt faster.

 

Ready to Buy Your First Home in North Carolina?

Now that you know how a debt-to-income ratio affects your mortgage application, you're one step closer to becoming a homeowner. If you're ready to start shopping for your first home in North Carolina, Margie Mueller can help! Contact us at (214) 232-8296 today to get started on your real estate journey!

Blog author image

Margie Mueller

I am so Lucky to be in Real Estate! Wife of 33 years and mother to 3 boys, I know what hard work is! I enjoy the complexity of real estate and the ever changing market we find ourselves in these days....

Latest Blog Posts

5 Risky Moves Homeowners Usually Make When Selling

Selling a house isn't always as easy as it seems. There are a lot of things that go into it, and if you're not careful, you could end up making some costly mistakes. Here are five risky moves

Read More

Are There Benefits for Seniors When Selling Their Homes?

A survey by Varsity Branding says that of those seniors who'd consider selling their homes, 44.5% do so because of their own or their partner’s health, 30.6% want freedom from home,

Read More

How Debt-to-Income Ratio Affects Your Mortgage Application

Data from PEW research shows that 67% of Americans apply for a mortgage to buy a home. Applying for a mortgage is a long and detailed process, and one of the most important factors that lenders look

Read More

7 Reasons You Should Retire at the Beach in North Carolina

It's always desirable to retire to a place with beautiful weather and scenery and where you can stay active and enjoy your life in peace. Well, North Carolina offers all of that and more! Here are

Read More