If you’re preparing to contact lenders in South Carolina, hoping they’ll lend you money to buy a house, there are several things you should know regarding debt-to-income (DTI) ratio. Lenders will undoubtedly be reviewing this aspect of your finances before determining whether they want to take you on as a client. If your DTI is too high, a lender is unlikely to approve your application for a mortgage loan.
Making a list of your current debts is a good place to start to determine your DTI before applying for a mortgage loan. Debt includes all payments you owe on a regular basis, such as an existing mortgage, an auto loan or child support. You’ll also want to write down your income, including any side-hustles or supplemental incomes aside from your primary source.
Calculating DTI ratio for a mortgage loan
Once you know the total amount of debt you owe monthly, as well as your total income, you can calculate your DTI ratio to apply for a mortgage loan. The basic formula to do this is total monthly debt/gross monthly income multiplied by 100. It’s important to note that some regular monthly payments or debts are exempt from DTI calculations, such as insurance premiums or child daycare fees.
If your DTI ratio is too high, a lender might deny your mortgage loan application. In addition to monthly gross income, however, if you own additional assets or have a large amount of savings, it may be possible to obtain a loan, even if your DTI ratio is above the preferred percentage.
Lower your DTI ratio before approaching a lender
The best way to increase your chances of obtaining a mortgage loan is to lower your DTI ratio as much as possible for submitting an application to a lender. The easiest way to do this is to pay off as much debt as you can before trying to buy a house. If you have debts, such as a balance on a credit card, that you can’t pay off altogether, contact the creditor to determine if you’re eligible for a lower interest rate.
Most importantly, do your best not to accrue new debt when preparing to seek a new mortgage loan. The less debt you have, the better—the more income you have, the better. The lower the percentage you get when dividing gross monthly income by current monthly debt times 100, the greater chance you have of gaining mortgage loan approval.