Your debt-to-income ratio (DTI) is a crucial factor that lenders consider when evaluating your mortgage application It measures the percentage of your gross monthly income that goes towards debt payments Lenders use this ratio to assess your ability to manage your monthly mortgage payments and overall financial stability,
What is counted as monthly debt?
When calculating your DTI, you need to consider all your recurring monthly debt obligations. These typically include:
- Monthly rent or house payment: This includes your mortgage payment, rent payment, or any other housing-related expenses.
- Monthly alimony or child support payments: If you are obligated to make regular alimony or child support payments, these are factored into your monthly debt.
- Student, auto, and other monthly loan payments: All your recurring loan payments, such as student loans, auto loans, personal loans, and any other installment loans, are included in your monthly debt.
- Credit card minimum payments: Even if you don’t carry a balance on your credit cards, lenders consider the minimum monthly payments you are required to make.
What is not included in monthly debt?
Some expenses are not considered monthly debt when calculating your DTI These typically include:
- Monthly utility bills: Your electricity, gas, water, and other utility bills are not factored into your DTI.
- Monthly insurance premiums: Your car insurance, health insurance, and other insurance premiums are not considered debt.
- Monthly cell phone and internet bills: These recurring expenses are not included in your DTI calculation.
- Monthly medical bills: Your medical expenses, even if they are recurring, are not considered debt for DTI purposes.
How to improve your DTI ratio
Lenders will find you to be a more appealing borrower if your DTI ratio is lower. Here are some ways to improve your DTI:
- Pay down existing debt: Reducing your outstanding debt, especially high-interest debt like credit card balances, can significantly lower your monthly debt payments.
- Increase your income: Earning more income can help improve your DTI ratio by increasing the denominator in the calculation.
- Negotiate lower interest rates: If you have high-interest debt, try to negotiate lower interest rates with your creditors. This can reduce your monthly payments and improve your DTI.
- Consider a co-signer: If you have a low DTI, you may consider adding a co-signer with a good credit score and income to your mortgage application.
The bottom line
Your DTI ratio plays a significant role in your mortgage eligibility and interest rate. By understanding what is considered debt and taking steps to improve your DTI, you can increase your chances of qualifying for a mortgage and securing a favorable interest rate.
Remember, a lower DTI ratio means a better chance of getting approved for a mortgage with a competitive interest rate. So, focus on reducing your debt and increasing your income to improve your DTI and achieve your homeownership goals.
Additional resources:
- What is a debt-to-income ratio? | Consumer Financial Protection Bureau (https://www.consumerfinance.gov/ask-cfpb/what-is-a-debt-to-income-ratio-en-1791/)
- Debt Considered When Getting A Mortgage | Rocket Mortgage (https://www.rocketmortgage.com/learn/when-applying-for-a-mortgage-what-is-considered-debt)
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Calculating Your Debt-To-Income Ratio
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FAQ
What is considered monthly debt?
How do you calculate monthly debt?
Do monthly bills count as debt?
Does monthly debt include food?
What are the biggest monthly debts?
Most of the big ones. Your mortgage payments – whether for a primary mortgage or a home equity loan or other kind of second mortgage – typically rank as the biggest monthly debts for most people. If you are applying for a new loan, your mortgage lender will include your estimated monthly mortgage payment in its calculation of your monthly debts.
How much debt do mortgage lenders want?
Most mortgage lenders want your monthly debts to equal no more than 43% of your gross monthly income. To calculate your debt-to-income ratio, first determine your gross monthly income. This is your monthly income before taxes are taken out.
How do you calculate recurring debt?
Beyond your mortgage, other recurring debts to include are: Next, determine your gross (pre-tax) monthly income, including: Now divide your total recurring monthly debt by your gross monthly income. The quotient will be a decimal; multiply by 100 to express your debt-to-income ratio as a percentage.
What debts count in a mortgage loan?
That means a lot more debts count, including: Your new monthly mortgage payments (including principal, interest, taxes, and insurance) Lenders will take a close look at your credit report and may ask for financial account statements in order to determine all of the obligations you have.