One of the Most Important Qualifying Factors When Purchasing a Home
Your income is one of your most important qualifications when it comes to getting a mortgage to buy a home.Lenders usually like to get their money back, so they want to make sure you have adequate income to keep up with your mortgage payments. When lenders evaluate your income, one of the most important measures of risk they use is your debt-to-income ratio, or DTI.
What is Debt-to-Income?
Your debt-to-income ratio is simply the percentage of your monthly gross income that goes to property expenses and loan payments. Lenders will typically include mortgage payments, property taxes, homeowners insurance, HOA dues, and any debt payments for auto loans, credit cards, credit lines, etc., in your DTI.
If you have a low DTI, you are a much better credit risk because you have extra cash flow left over at the end of the month to absorb unexpected expenses. On the other hand, if you have a high DTI, lenders consider you much riskier because it’s more likely you will miss a mortgage payment if you get into a financial bind.
The maximum debt-to-income ratios allowed today’s mortgage marketplace are 50% for FHA-insured financing and 45% for conventional Fannie Mae financing. It is sometimes possible to exceed these ratios, but usually only if you have other compensating factors such as stellar credit or substantial assets in the bank.
How DTI Impacts Purchase Price?
If you’re purchasing a home, your DTI can have a direct impact on how much home you can qualify for. A more expensive home will typically come with a larger loan amount, which of course means a larger mortgage payment.
If you want to qualify for the most home you possibly can (though it’s usually advisable to buy what you can comfortably afford), it’s essential that your DTI be as low as possible. Make sure to pay off all credit cards, student loans, auto loans, etc., before you start shopping for a mortgage. This will not only make it much easier to qualify for the home you really want, but it will make home ownership more enjoyable because you can more easily cover the payment.