What is a good debt to income ratio? As a first time homebuyer, it is important to know the answer to this question so you can qualify for a home loan. With your debt to income ratio within a reasonable range, the process of qualifying for your mortgage loan will be that much easier. So, let’s dive into what is a good debt to income ratio.
What is Debt to Income Ratio?
Debt to income ratio––also referred to as DTI––is the percentage of your monthly pre-tax income that you spend to pay your debts. Payments can include your monthly rent or mortgage, any automobile loans and credit card payments. DTI is used as an indicator to show any potential lenders how much money you spend versus how much money you make. There are two types of debt to income ratio: front end and back end.
Front End Debt to Income Ratio
Your front end debt to income ratio is determined by much money you spend on housing expenses, such as rent or mortgage. This amount is based on your gross income (income before taxes).
Back End Debt to Income Ratio
Your back end debt to income ratio is determined by all your required monthly debts. This includes but is not limited to credit cards, automobile loans and personal loans, as well as any applicable debts found on your credit report. Lenders tend to focus on the back end DTI, as it gives them a more complete picture of your monthly debts.
How to Calculate What is a Good Debt to Income Ratio?
Calculating your debt to income ratio is a simple math equation: your monthly bills divided by your gross monthly income. The number you arrive at is your DTI and the lower your DTI is, the less risky you are to lenders.
Importance of Knowing What is a Good Debt to Income Ratio
Your DTI is an essential indicator of your financial security. The higher the number, the less confident lenders are that you can comfortably pay down your debt. Therefore, it is important to consider your DTI when making big financial decisions, such as moving or changing jobs, especially as you get closer to purchasing a home.
Moving to a new apartment that costs more increases your DTI. However, changing jobs to one that pays more gives you extra income to pay down debts and lower your DTI. This is very important information to consider when preparing to buy a home.
What is a Good Debt to Income Ratio?
To qualify for a conventional loan, the highest DTI a lender will allow is 50%. For a greater chance of approval, having a DTI of 45% is recommended. With no single set requirement, the needed DTI will depend on your personal situation and the loan you are applying for.
To qualify for an FHA loan, your debt to income ratio also must be 50% or less. And even though lenders can qualify you with a higher DTI, you are more likely to be approved with a DTI of 43% or less.
Now you know the answer to the question, “what is a good debt to income ratio?” The next step is to calculate your DTI and make any necessary adjustments needed to qualify for a home loan. Whether that is paying down debts or decreasing your monthly output, you will soon be well on your way to a lender-friendly DTI. Then, contact Wyndham Capital Mortgage to start the process of qualifying for a home loan.