Debt-to-income ratio defined
I had a client contact me recently that wanted to buy Fresno real estate. She is currently renting, divorced within the past four years and was wondering if she could move to the next step of owning her own home.
The buyer knew enough to check her finances before taking time to look and become emotionally attached to a particular property. This is STEP ONE that a buyer should be taking.
DEBT-TO-INCOME RATIO
This client has done her homework. Let me explain.
She focused first on her debt-to-income ratio before she contacted a mortgage professional. She wanted to have a good idea if she could qualify for a mortgage before having a financial institution pre-approve her for a loan.
Debt-to-income ratio (DTI) is the first test of mortgage-worthiness and one you can calculate on your own (just like my client did) for free.
The debt-to-income ratio is an equation that is easy to figure out.
For starters, take the sum of your family’s fixed monthly expenses. The following is a sample list of fixed monthly expenses:
- mortgage,
- car payments,
- minimum credit card payments,
- monthly child support, and
- student loans
Take all of your fixed monthly expenses, total them and divided by your household’s gross monthly income.
Fixed monthly household expenses ÷ gross monthly household income = debt-to-income ratio
RULE OF THUMB
Once you have your debt-to-income ratio calculated, what are looking at and where should it be to impress a lender to take a chance on you.
Every situation will be different, but lenders will look for DTI in the 42% neighborhood.
If you are looking for a mortgage professional to help you secure a loan, contact our office and we can refer you to the professional that makes the most sense for your situation.
