What is Debt-to-Income (DTI) ratio?

If you are a first-time home buyer and are trying to secure a mortgage, chances are the lender has asked you what your DTI is. DTI stands for debt-to-income ratio, which is the percentage of your monthly income paying debt. Your lender uses the DTI ratio to determine how much of a risk you are paying back a loan. Expenses you incur that can count toward debt can include car payments, mortgage payments, student loans, or anything that requires a regular monthly payment. To figure your own DTI, add up all your recurring monthly expenses, and divide by your gross monthly income (the amount you earn each month before taxes and other deductions are taken out). According to The St. Louis Federal Reserve, which tracks the nation's household debt payments as a percentage of household income, the average American's DTI from the second quarter of 2020 is 8.69%.

What is a good DTI range for mortgage lending eligibility?

Lenders have different DTI requirements. Maximum eligible DTI may range from 35% - 45% dependent on the loan type, product, and other eligibility criteria. For certain qualified mortgage programs, the maximum eligible DTI may be 43%.  There are other mortgage lending programs that may allow higher DTI ratios.

How can I lower my DTI?

Here are a few tips to help you lower your DTI:

• Make a list of all the debt you currently incur, placing the highest debts owed at the top. Pay the top debt off first while you pay the minimum on the other debts. Continue to pay off debts as you move down the list.
• Do not make any significant purchases and take on more debt.
• Lower the interest rate on your high-interest credit cards with a credit card balance transfer. Depending on your FICO score, you may be able to transfer to a new card with an introductory 0% APR.
• In some instances, refinancing outstanding loans may make sense. If the interest rate is currently lower than what you are paying for personal or student loans, refinancing can save you money, which can be used to repay your loan faster.
• Make only essential purchases, food, clothing, utilities. Try never to charge a purchase.
• A quick way to lower your DTI is to increase your income. Consider taking on a second job or ask for a raise.

If you have questions about your DTI or how to secure a mortgage loan, talk to the experts at NASB. You can give us a call at 855-465-0753 or click here for how to get started on a home loan. 

This is not intended to and does not constitute legal advice or financial / investment / tax advice. North American Savings Bank does not make any guarantee or other promise as to the results obtained. The consumer should consult a tax adviser for further information regarding the deductibility of interest and charges.