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Understanding Debt-to-Income Ratio

One of the most important aspects of qualifying for a mortgage is your debt-to-income ratio. You may have heard percentages ranging anywhere from low 20% and up to 50% mentioned with mortgage qualifications but what do those percentages mean and why are they important? The debt-to-income ratio is used as a measure of how much you can afford to pay every month. The higher the debt-to-income ratio you go, the more money you have available to buy a home and still obtain a qualified mortgage. In addition – the higher the percentage, the more risk the lender is exposed to whereas the lower the percentage the opposite is true. Higher percentages could result in a higher interest rate or mortgages that accept higher DTI ratios.

The ratio works like this: Say you earn $8,000 a month before taxes and deductions, and you have $1200 in monthly debts such as rent, mortgage, taxes, insurance, auto lease or loans, and credit card payments. Total that monthly debt and divide it into your gross monthly income. The result is your debt-to-income ratio.

Your loan officer can guide you to which options fit your needs best based on your DTI.

Source: Consumer Financial Protection Bureau & MMG