DTI Explained: Your Path to Mortgage Approval

Unlock the power of your Debt-to-Income Ratio (DTI)—your secret weapon in your homeownership journey! Far from being just another financial acronym, DTI is a dynamic tool that transforms potential challenges into exciting opportunities. It's a map of your financial fitness that helps lenders understand your borrowing potential while giving you a clear roadmap to mortgage approval. By strategically managing your DTI, you're not just applying for a mortgage; you're crafting a brilliant financial future and taking confident steps toward the keys of your dream home. Let’s dive in.

DTI Defined

DTI is the calculation of a potential borrower’s overall debt in relation to their overall income. Put simply, it shows lenders how much money a borrower has left after making all of their required payments each month. Typically figured on a monthly scale, an individual’s DTI ratio is found by summing all monthly debt payments and dividing that number by total monthly gross income (income received prior to taxation). This resulting percentage is then used as a key factor in determining whether or not a loan should be approved and under what stipulations, including the interest rate and length of repayment.

Front-End Vs. Back-End DTI

When discussing your borrowing options with your lender, you may hear them refer to front-end DTI and/or back-end DTI. Front-end looks at your potential mortgage payment in relation to your gross monthly income. At the same time, the back-end considers the potential mortgage in addition to all other outstanding monthly debt—including auto loans, credit card debt, student loans, personal loans, etc. Then it divides that total by the gross monthly income. Therefore, front-end numbers are lower than back-end as they only look at the mortgage payment compared to the monthly income.

Desirable DTI Ratios

A desirable DTI ratio that homebuyers should aim for is lower than 43%. However, depending on your unique financial situation, your lender may consider a DTI higher than this to tailor your loan to fit your needs. Many loan options, such as conventional, FHA, and VA loans, allow for higher ratios. Curious to know where your numbers are sitting? Plug your info into our Affordability Calculator to see how your finances line up.

Decreasing DTI

Lower might be better, but how possible is a desirable DTI to achieve for individuals with higher debt and limited income? It will take some discipline, but it is possible to move that needle when necessary.

Pay Down Debt

One way you can reduce your DTI is to pay down small debts such as credit cards to reduce the required monthly payment. If you go this route, make sure to keep a paper trail, as it will take about 30 days for your credit report to reflect the change. However, always consult with your loan officer to run through scenarios for paying off debt. They can guide you toward the best options that will meet your financial needs.

Add a Co-Borrower

Depending on your financial situation, adding a co-borrower may be a good option. Adding a co-borrower to your mortgage application may increase the denominator of your DTI—assuming they have a monthly income greater than their monthly debt payments.

Don’t Acquire New Debt

Another factor to keep in mind is not opening any new debts prior to or during the mortgage process. This helps to keep your DTI where it’s already at so you don’t jeopardize your loan approval.

Ruoff is here to guide you on your path to homeownership. Contact a loan officer in your area to get a more detailed analysis of your purchasing power.