Curious about your debt-to-income ratio and what it means for your mortgage application? This number is critical to lenders, who look at your monthly expenses and debt load to assess the likelihood that you’ll make mortgage payments on time. The lower your ratio, the better your chances of being approved.
But what exactly is it?
Your debt-to-income ratio is the percentage of your gross monthly income that goes toward your monthly debts. This includes payments for credit cards, auto loans, student loans, and any other debts you may have.
How can you calculate it?
Simply divide your monthly debt payments by your gross monthly income. To qualify for most mortgages, lenders typically want your total expenses, including your estimated mortgage payment, to be no more than 43% of your income. However, a high debt-to-income ratio doesn’t necessarily mean that you won’t qualify for a mortgage – but you might end up with a higher interest rate and monthly payment.
What else do lenders consider?
In addition to your debt-to-income ratio, lenders will review your FICO credit score, employment history, and savings to determine your overall financial health. By paying off debts, lowering credit card balances, and maximizing your income, you’ll boost your chances of being approved for a mortgage with favorable terms.