The more you know about the home buying process, the more confident you will be in making the crucial decisions that will shape your home ownership experience. The information provided will help you make the best decision in your home purchasing decisions. What does the debt-to-income ratio (DTI) mean?
What Is Debt-to-Income Ratio?
Having debt is normal and sometimes even necessary for life's big moments, such as purchasing a home or pursuing an education. What happens if you take on more than you can handle?
The answer lies in your debt-to-income ratio. Your debt-to-income ratio is all your monthly debt payments divided by your gross monthly income. This number is one-way lenders measure your ability to manage the monthly payments to repay the money you plan to borrow.
Take this quick debt-to-income assessment in Metro's Save and Succeed Tools: https://save-and-succeed.metrofcu.org/debt-to-income.
Determining Your Appropriate Debt Load
The lower your debt-to-income ratio, the more manageable your debt load will be. A low debt-to-income ratio increases the odds that you will be able to meet your monthly obligations. This ratio and your credit score are the two most important factors used by creditors when extending loans.
To calculate your debt-to-income ratio, combine your monthly expenses and divide by your total monthly income. A ratio less than 36% is desirable, while a percentage less than 43% is usually required to be approved for a mortgage. A ratio higher than 50% is viewed by most lenders as problematic.
Can you manage your debt load?
This Save and Succeed course dives into the various strategies and resources available to help you tackle your debt. The course invites you to evaluate your financial situation and how different pay-down methods could work for you.
Working out whether you have a healthy or unhealthy level of debt is an essential part of managing your credit. In this Save and Succeed video, you are shown how you can assess your debt load. https://save-and-succeed.metrofcu.org/videos/determining-your-appropriate-debt-load.
Getting Approved for a Mortgage
A mortgage payment consists of four parts: principal amount, interest payment, insurance, and taxes. When you apply for a mortgage, lenders look at your DTI. Lenders usually use the 28/36 rule as a sign of a healthy DTI. This means you won't spend more than 28% of your gross monthly income on mortgage payments and no more than 36% on total debt payments (including mortgage, student loan, auto loan, and credit card debt). If your DTI ratio is higher than the 28/36 rule, some lenders may be willing to approve you for financing, but there will be a higher interest rate charge and possible extra fees like mortgage insurance to protect the lender in case the mortgage payment cannot be made.
A fall home purchase could be ideal for homebuyers with a smaller budget. There are fewer buyers in the fall, and that may give a buyer more room to negotiate. Learn more about the mortgage pre-approval process and understand other basic terms of a mortgage transaction.
First Time Homebuyers
First-time homebuyers should meet with a loan officer to identify the amount they qualify for and find the best loan for their situation. The mortgage team at Metro Credit Union mortgage can help navigate your homeownership dream. Metro Credit Union Mortgage is the home lending side of Metro Credit Union. We offer a wide variety of loan options:
- Purchase and Refinance loans
- Variable Rate loans
- Second Mortgages
- Home Equity Loans
- FHA/VA loans
- Bridge loans
Buying a home is a big step, but it does not have to be scary. When you are in the market for a home loan, you know you can trust your credit union to provide a great rate, great service, and all with fewer and lower fees. Read more about what is involved in purchasing a home: