Orange County, CA – Debt to income ratios don’t need to be complex. While we might get bogged down in technical jargon at times, it’s important to simplify the terms that are common in mortgage lending. Simply put, debt to income ratios are an investor’s tool for determining your budget.
The debt-to-income ratio, or DTI, is an important calculation used by banks to determine how large of a mortgage payment you can afford based on your gross monthly income and monthly liabilities.
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While credit scores are certainly important, what they often don’t know is that another number, debt-to-income ratio (DTI), can play an even bigger role in their ability to get a mortgage. In fact, a high DTI is the #1 reason mortgage applications get rejected 1 .
The front-end ratio focuses solely on your housing debt, whether it’s rent or mortgage payments. Let’s say you’re trying to get approved for a home loan that has a $1,000 monthly mortgage payment and you earn a gross monthly income of $5,000. You would divide the mortgage payment by your income amount to get a front-end DTI ratio of 20%.
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A debt-to-income ratio of 15 percent would mean your total non-mortgage debts costs $437.50 or less each month. Tier 2 – 15 to 20 Percent The next tier is a debt-to-income ratio of between 15 and 20 percent.
When I talk to customers about getting a mortgage, they’re often concerned about their credit score, which is an indicator of their ability to pay back loans and can affect the rates they’ll be able to get.While credit scores are certainly important, what they often don’t know is that another number, debt-to-income ratio (DTI), can play an even bigger role in their ability to get a mortgage.
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If your gross monthly income is $6,000, then your debt-to-income ratio is 33 percent. ($2,000 is 33% of $6,000.) Evidence from studies of mortgage loans suggest that borrowers with a higher debt-to-income ratio are more likely to run into trouble making monthly payments.
Your debt-to-income ratio (dti) compares how much you owe each month to how much you earn. Specifically, it’s the percentage of your gross monthly income (before taxes) that goes towards payments for rent, mortgage, credit cards, or other debt.
The Ideal Debt-to-Income Ratio for Mortgages While 43% is the highest debt-to-income ratio that a homebuyer can have, buyers can benefit from having lower ratios. The ideal debt-to-income ratio for aspiring homeowners is at or below 36%.
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