How important is the debt-to-income ratio?

On Behalf of | Nov 30, 2019 | real estate banking & finance | 0 comments

When buying a home in Florida, you most likely must secure a mortgage loan from a lender. Lenders have strict requirements you must meet to qualify for a loan. A home loan is one of the largest debts you will take on. It also requires a long-term commitment, often around 30 years. This makes them risky for lenders, and the main goal of a lender is to always reduce risk.

They want to be sure you will pay them their money, so they take every chance possible to assess how risky you are as an investment. That is why there are so many requirements. You probably know they will want to look at your income and consider your credit report, but one thing that will often become the deciding factor for a lender is your debt-to-income ratio.

The debt-to-income ratio, according to the Consumer Financial Protection Bureau, tells the lender how much debt you have compared to how much income you earn. It lets them know if you can afford the mortgage payments. Generally, you want to have far less debt than income.

To figure your debt-to-income ratio, lenders will divide your monthly debts by your monthly income. They look for a percentage that is no higher than 43%. This is an industry standard, but you may find a lender or program willing to allow a higher DTI, but that is rare.

DTI should matter to you too. After all, if you buy a home, you want to keep it and not lose it to foreclosure. If a lender tells you that your DTI is too high, then you should take steps to fix it so when you buy a home, it is not a financial struggle.