DTI! WHAT IS IT?

DTI

If you are in the homebuying process, you have undoubtedly heard the term DTI over and over again. What is a DTI and why is does it matter? DTI stands for Debt-To-Income Ratio. The DTI is one of the most  important ways a lender analyzes your application for credit.  A DTI is not just for mortgages. A DTI analysis is completed for Automobile Loans, Credit Card Applications and Mortgage applications. When you apply for a mortgage,  auto loan, credit card or other types of loan, banks and other lenders calculate your DTI to help determine if you can afford more debt. In lenders terms do you have the capacity to pay for new credit?     How much more debt can you afford?

What is a Debt-To-Income Ratio? 

The DTI Ratio is a formula comparing your total monthly payments to your total monthly income. How is the DTI Calculated?

  1. The first step is adding up the total credit accounts and other fixed payments you pay each month. This does not include utilities, insurance and other debts. Just Credit Accounts and other obligations.
  1. Monthly Minimum Credit Card Payments.
  2. Automobile Loans monthly payment.
  3. Housing Expenses: Principal Interest Taxes Insurance (PITI) on your home.
  4. Other Obligations: Alimony and Child Support.
  1. The second step is determining your Gross Monthly Income (GMI). Your GMI is income before taxes and other deductions.
  2. The third step is divide your monthly debt payments by your GMI to determine your ratio.

Let’s look at an example:

  • Your total debt payments, mortgage, automobile loan and credit card payments, add up to $2,300.00 per month.
  • Your GMI is $6,000.00 per month.
  • Your DTI is $2,300.00 divided by $6,000.00 equaling 38.3%. ($2,300.00/$6,000.00 = 38.3%).  38.3% is avery good DTI!

What is a good DTI? Different Loan Programs have different DTI Limits. In general the lower the DTI the better. Standard DTI limits for FHA are 43%, but can go as high as 56% for FHA Loans when you have good credit, savings, residual income and reserves. For Conventional Loans the standard DTI Limit is 36%, but can go to 49% when you have  good credit, savings, residual income and reserves. The DTI gives a lender a good benchmark on your ability to support new credit and payments. Lenders will have different limits for DTI. Keep in mind.   No matter what your lender says you can afford, you need to be comfortable with the monthly payments.

How can I lower my Debt-To-Income Ratio?

If your lender tells you your DTI is excessive or you want to improve your DTI and monthly cash flow here are 5 ways to improve your DTI:

  1. Make a plan to pay off your Credit Cards. Prioritize paying off the Credit Cards off with Higher Interest Rates and higher monthly payments.
  2. Pay extra.  Pay more than the minimum required payment each month. You will pay off the Credit Card Faster and reduce the overall interest you pay.
  3. Ask for help. Do not hesitate to call your creditor to see if they will lower your interest rate. You can use the savings to pay off your accounts faster.
  4. Do not apply for new debt. No matter how good that extra 20% sounds, do not get new debt.
  5. Refinance debt to lower rate debt. Automobile Loans can be refinanced to lower rates lowering your monthly payments. Credit Card balances can be transferred to other Credit Cards with lower rates.

You can reduce your monthly debt and improve your DTI with a plan. Even if you are not looking for a mortgage reviewing your DTI each month can help you effective manage your debt. If you are looking to buy your new home, the first step is to contact your FDM Mortgage Professional to determine your DTI and what you qualify for.


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