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Seven Things To Know About Debt-To-Income (DTI) When Buying A Home

June 12, 2024

In today’s home buying process, there are so many confusing acronyms to deal with: DTI, APR, PMI, the list goes on. One of the most important acronyms to understand, however, is something called debt-to-income ratio, or DTI. Basically, DTI is a way for banks to figure out if you can afford a mortgage loan. It's represented by a number that shows how much debt you have compared to how much money you make. Knowing what your DTI is will make a big difference in figuring out how much home you can afford to buy. In this article, we'll talk about the top seven things you need to know about DTI, so you can work toward your dream of owning a home, confidently.


1. The Definition of DTI

Debt-to-income ratio (DTI) is a metric used by lenders to determine your ability to manage monthly mortgage payments. According to ConsumerFinance.gov, it’s calculated by dividing your total monthly debt by your gross (before taxes) monthly income.
2. The Two Types of DTI

Lenders use your DTI to determine your ability to repay the loan. The experts at Experian explain that for most mortgages, lenders prefer the front-end DTI which calculates how much of your gross income goes toward housing costs, while the back-end DTI calculates all monthly debt payments.

3. The Maximum DTI Ratio Needed

Lenders typically have maximum DTI ratios you need to meet to qualify for a mortgage. These ratios can vary but are usually around 28-36% for front-end DTI and 36-43% for back-end DTI.

4. Impact of DTI on Loan Approval

Your DTI directly influences your mortgage approval chances. If your DTI is more than the lender's maximum allowance, it may indicate that you owe too much and may struggle to make mortgage payments, leading to potential rejection of your loan application.

5. Verifying Income for DTI

Lenders can verify your income through pay stubs, W-2 forms, tax returns and other documentation to calculate your DTI accurately. While this may seem like giving too much personal information, it is important to provide this accurate and up-to-date income information during the mortgage application process.

6. What Kinds of Debt are Considered in DTI

Various debts contribute to your DTI, according to Investopedia, including mortgage payments, property taxes, homeowner's insurance, car loans, student loans, credit card payments and other monthly obligations.

7. How to Lower Your DTI

Equifax shares steps on how you can improve your DTI. Other strategies include increasing your income, paying off existing debts, consolidating debts to lower interest rates or reducing unnecessary expenses. Lowering your DTI can enhance your mortgage eligibility and potentially qualify you for better loan terms.

Understanding DTI is important if you’re considering buying a home. Remember, DTI measures how much of your income goes toward debt payments and greatly affects your ability to get a mortgage. For more advice and guidance on navigating home

buying, including first home financing and nontraditional home financing, contact a friendly Heartland Bank mortgage lender today. We can provide valuable insights and help you take the next steps toward making your dream of homeownership a reality.

This article may reference and link to third party information that has been verified to the best of our abilities. There is no guarantee of accuracy. Heartland Bank does not endorse companies, services, or products referenced in its articles and is not responsible for the content, links, privacy, or security policies of these third parties. Information in the above article may include material from the Consumer Financial Protection Bureau (https://www.consumerfinance.gov/ask-cfpb/what-is-a-debt-to-income-ratio-en-1791/), Experian (https://www.experian.com/blogs/ask-experian/credit-education/debt-to-income-ratio/), Investopedia (https://www.investopedia.com/ask/answers/081414/what-counts-debts-and-income-when-calculating-my-debttoincome-dti-ratio.asp), and Equifax (https://www.equifax.com/personal/education/credit/score/articles/-/learn/debt-to-income-ratio-vs-debt-to-credit-ratio/)

This content is for informational purposes only. Readers should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific advice from their own counsel.