Source: CNBC —
There’s a lot that goes into the home buying process, especially if you’re a first-time home buyer. One criteria mortgage lenders use to assess your mortgage application is the debt-to-income ratio (DTI). Your debt-to-income ratio is a comparison of how much you owe (your debt) to how much money you earn (your income). The income you make before taxes (your gross income) is used to measure this number.
A lower debt-to-income ratio tells lenders you have a healthy balance between debt and income. However, a higher debt-to-income ratio indicates that too much of your income is dedicated to paying down debt. This could make some lenders see you as a risky borrower. While the DTI isn’t the only factor used to assess how much you can borrow, it’s still important to understand before you begin the home loan process.
What is a good debt-to-income ratio?
A debt-to-income ratio of 20% means that 20% of your income is going toward debt payments. This includes cumulative debt payments, so think credit card payments, car payments, student loans, personal loans and any other debt you may have taken on.
According to a breakdown from The Mortgage Reports, a good debt-to-income ratio is 43% or less. Many lenders may even want to see a DTI that’s closer to 35%, according to LendingTree. A ratio closer to 45% might be acceptable depending on the loan you apply for, but a ratio that’s 50% or higher can raise some eyebrows.
Simply put, having too much debt relative to your income will make it harder to qualify for some home loans. That’s why many common forms of debt — like student loan debt or credit card debt — can be a major barrier to homeownership.
Mortgage lenders want to make sure borrowers haven’t overextended themselves in terms of how much debt they can afford to take on. This is why having a high DTI could cause lenders to decline your mortgage application.
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