Your debt-to-income ratio shows how much debt you pay compared to your monthly salary. The lower it is, the better.
At Midland Mortgage, we use the debt-to-income ratio (DTI) to determine how much home you can afford. Learn how we use it and what you can do to get the home you want.
We add your debts - mortgage payment, loan payments, and minimum credit card payments - and divide it by your monthly salary. If you make a $150 car payment, $200 student loan payment, and $1000 mortgage payment, and you have a $4,000 monthly income, your debt-to-income ratio is 33 percent.
We want to know that you can afford your mortgage, and we want to see a DTI of less than 43 percent - preferably, even lower than that. We can use the mortgage payment as a variable in the calculation. With a monthly income of $3,500, for instance, a total debt payment of $1,505 would result in a 43 percent DTI. If your current loan and credit card payments are $500, you could take on a mortgage of $1,005 per month. This figure will include mortgage payment, property taxes, and insurance.
To qualify for a higher mortgage, reduce your DTI by paying down or eliminating debts. Focusing on this for a year before you apply for a mortgage will put you in a better financial position. It will also improve your credit score.
Come talk with the mortgage experts at Midland Mortgage about how you can qualify for a mortgage.