Are you thinking of buying a house in the next two years? You might be worried about your credit score, or the amount of money you have as a downpayment…
…and while those are two very important factors when buying a home, there’s actually a really significant metric you have to take into account:
Your Debt-To-Income Ratio
The debt-to-income ratio, or DTI, is actually one of the biggest barriers to acquiring a mortgage. This isn’t a factor if you’re buying a property with all cash, but if you’re in need of a mortgage, a lender will need to look into income vs outgoings to ascertain what they deem you can afford.
Your DTI is analyzed by comparing your monthly income to the amount of recurring debt you have. In the eyes of a mortgage lender, the lower your percentage of debt compared to your income, the better, and they’ll be able to lend you more money. As a rule of thumb, lenders want your DTI to be less than 36%.
The only way you’ll truly know your DTI is by speaking to a trusted mortgage lender (contact us for a list of our vetted lenders).
Improving Your DTI
Whether you know you have a less-than-ideal DTI, or you’re totally guessing, you might be wondering how you can achieve financial greatness and make it better! Let’s discuss some methods:
- Ditch the Hulu subscription… or that unused gym membership, meal plan or anything else you really don’t need right now. Unnecessary expenses weigh down your budget and your debt will look much healthier if you resist impulse buys and cancel payments that aren’t essential.
- Increasing that income. It might seem obvious that to improve DTI you need to simply increase the “I” part, but there are many different ways of doing this other than hoping for a raise at work. Side hustles have never been easier to monetize, whether that’s becoming a house sitter, selling handmade products on Etsy, or even getting sponsored brand deals on Tiktok. Just be sure to keep track of your income and expenses for tax purposes.
- Be smart about debt. Reducing debt is the goal, but you need a prioritization strategy. A quality mortgage lender will be able to assess your borrowings and their interest rates, and show you where you could consolidate debt to improve your DTI.
Boosting your DTI is a marathon, not a sprint. It takes time and dedication to see those numbers improve, so arm yourself with a team of experts (starting with a mortgage lender and local real estate agent) and you’ll be on your way in no time.
