A lender will assess your financial situation before granting you a mortgage to ensure that you can afford the payments and that you are stable. This is the lender’s guarantee that you can manage the mortgage.
That said, to assess your financial health, one of the things lenders look at is your debt-to-income ratio (DTI). A good DTI is vital in getting your mortgage approved and netting the best interest rates available.
What’s Debt-to-Income Ratio?
Debt-to-income ratio (or DTI) is the ratio of a person’s monthly debt payments to their gross monthly income. Lenders use it to assess borrowers’ ability to make loan payments. A lower DTI ratio indicates that a person can better manage their debt and is more likely to make their loan payments on time.
How Is Debt-to-Income Ratio Calculated?
DTI is calculated by dividing a person’s total monthly debt payments by their gross monthly income. The total debt payments include loans, credit cards, child support, and other debt-related payments. Gross monthly income refers to income before taxes and other deductions.
For example, if a person has $1,000 in monthly debt payments and earns $2,000 in gross monthly income, their DTI ratio would be 50%, which is calculated by dividing the monthly debt by the gross monthly income and then multiplying by 100.
What’s the Ideal Debt-to-Income Ratio for Mortgages?
Most lenders prefer to see a DTI ratio of 36% or less. This indicates that a person can better manage their debt and is more likely to make their loan payments on time. A higher DTI ratio may suggest that a person is overextended and may have difficulty making payments. It’s important to note that DTI is only one factor that lenders consider when making decisions about loan applications. Other factors include credit score, income, and assets.
It’s important to note that DTI is only one factor that lenders consider when making decisions about loan applications. Other factors include credit score, income, and assets!
What Can I Do to Lower My Debt-to-Income Ratio?
The first step is to create a budget. Knowing how much money you have coming in and how much is going out each month is essential for managing your finances. Once you have a budget, you can look for ways to reduce your expenses and pay off your debt.
Start by focusing on the high-interest debt first. Paying off high-interest debt is one of the fastest and most effective ways to lower your debt-to-income ratio. Try making more than the minimum monthly payments, as this will help you pay off your debt faster.
If you have multiple credit cards, consider consolidating them. Consolidating your credit card debt can help you save on interest and make it easier to manage your payments. You can also look into balance transfers, which allow you to move the balance of one credit card to another with a lower interest rate.
It’s also essential to make sure that you are making at least the minimum payments on all of your debt each month. Missing payments can lead to late fees and higher interest rates, increasing your debt-to-income ratio.
Finally, if you’re struggling to make ends meet, consider talking to a credit counselling service or a financial advisor. They can help you create a plan to get out of debt and lower your debt-to-income ratio.
As you can see, your DTI plays a massive role in your ability to get your mortgage. So, make sure to manage your DTI and ensure that it is in good shape. If it isn’t, work on it immediately so that when the day comes and the lender checks the numbers, they’ll be obliged to give you good deals! But of course, also focus on other factors like your credit score to ensure you get the best.
Ottawa Mortgage Services offers first-time homebuyers, self-employed individuals, and more the chance to get the mortgage they need to own their dream home. Reach out to us today and get the financial help that you need!