Debt-to-Income Ratio (DTI)
Definition:
Debt-to-Income Ratio (DTI) is a financial metric that compares a borrower’s monthly debt payments to their gross monthly income. Lenders use DTI to assess a borrower’s ability to manage their debt and determine how much mortgage they can afford. A lower DTI suggests that a borrower has a good balance between debt and income, making them less risky to lenders.
🔍 Did You Know?
Most lenders prefer a DTI ratio of 43% or lower when approving a mortgage. A high DTI can result in loan rejection or higher interest rates.
Examples:
Example 1:
A borrower earns $5,000 per month and has $1,500 in monthly debt payments, including credit cards, car loans, and student loans. The DTI is calculated as:
[($1,500 ÷ $5,000) x 100 = 30%]
Example 2:
A real estate investor earns $8,000 per month and has $3,600 in monthly debt obligations, including mortgage payments and other loans. Their DTI is:
[($3,600 ÷ $8,000) x 100 = 45%]
The higher DTI could make it harder for them to qualify for additional financing.
Why It’s Important:
DTI is a crucial factor for lenders in determining a borrower’s eligibility for a loan. A lower DTI increases the chances of loan approval and better loan terms, such as lower interest rates. It also helps borrowers manage their finances by ensuring they’re not over-leveraged. For real estate investors, keeping a low DTI can open up opportunities for securing financing for multiple properties.
Who Should Care:
- Homebuyers who need to know if their DTI will impact their mortgage application.
- Real estate investors managing multiple loans and aiming to keep their DTI low to secure additional financing.
- Lenders who use DTI to evaluate borrower risk and determine loan eligibility.
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