DTIThe real estate market is rife with terminology that can make a Plano home purchase seem more than a little complicated. If you’re currently looking for a Plano home and are considering your loan options, you may have even heard the term ‘Debt to Income’ ratio. In the interest of simplifying things, here are some insights on what this term means and how it can impact your home investment.

Determining Your ‘Debt to Income’ Ratio

It’s important to consider what exactly your Debt-to-income or DTI ratio is before your home purchase as this will quickly determine how much of a home loan you can actually qualify and be approved for. To calculate this number, take your monthly debt payments – including any credit card, car loan, student loan, child support, and mortgage payments – and divide them by your monthly gross income to get a percentage. For example, your total monthly debt is $700 + your new monthly home payment is $1600 = $2300 and you make $5800 per month in gross (before taxes) income, your DTI is 40% (2300 / 5800 = .40).

 What Your DTI Means To The LenderDTI

The DTI is a very important number when it comes to a home loan because it enables the bank to determine your financial situation. A DTI of 25% leaves some wiggle room, as most Lenders will allow a DTI percentage that runs up to 43%. In the case of the above example, this means that the most debt this person could take on per month is about $1749. While banks vary on this percentage, credit history plays an important part in the DTI that will be allowed.  With excellent credit, stable income, assets and reserves in the bank after closing, Highlands Residential Mortgage could potentially allow up to 54% DTI.

DebtPaying Down Your Debt Or Purchasing A Home

In the event that you have a DTI ratio that exceeds what your bank will allow, you will need to consider your debts before moving on to investing in a home. If you’re planning on purchasing a home in the next year, it’s a good idea to tackle high-interest debt first. However, if you happen to have a chunk of money saved up that you’re planning on putting into a down payment, it’s worth considering that putting more than 20% down may slightly increase the DTI percentage your bank will accept.

There are many fancy terms that go along with the world of real estate, but it’s important to understand what they mean so you can make them work in your favor. If you’re calculating your DTI ratio and are planning a home purchase down the road, call Warren Whitaker at 972.523.8353 or Warren@LendHome.com, your trusted mortgage professionals for more information.

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