Becoming a Homeowner Despite the Weight of Debt: A Guide to Debt-to-Income Ratio
Let's be honest, we all carry the burden of debt. In fact, your average Joe has over $25,000 in outstanding bills. Debt seems to be an unavoidable part of life, and it's not fun. So, what can we do about it?
Here's some uplifting news - being in debt isn't the end of the road. Yes, even with a high debt-to-income ratio, you can still work towards your dream home!
Untangling the Debt-to-Income Ratio
A Debt-to-Income Ratio (DTI) might sound like a math nightmare, but it's pretty simple. It's the size of your debt compared to your income, shown as a percentage. It's a snapshot of your financial health, showing how much you owe compared to how much you earn.
You'll see two types of DTI - front-end and back-end.
Front-End DTI: Only considers your housing-related costs. It's how much of your monthly income goes towards housing expenses like mortgage payments, insurance, and property taxes.
Back-End DTI: Takes into account all your monthly debts, including housing. This gives a fuller picture of your spending habits and is usually more important to lenders.
Why Does It Matter?
Your DTI is the magic number lenders look at when you apply for a mortgage loan. A high DTI can make it hard to get your foot on the property ladder because it affects your loan terms, interest rates, and how much you can borrow.
So, how do you find out your DTI?
Calculating Your Debt-To-Income Ratio
Calculating your DTI isn't rocket science. You take your total monthly debts and divide them by your monthly income, then multiply by 100. Here it is as an equation: (D / I) x 100
What's a Good Debt-To-Income Ratio?
A high DTI is usually over 50%. Lenders generally prefer it to be below 36%. Anything below that means you'll have enough leftover money each month to cover your mortgage and bills.
Can You Get a Mortgage With a High DTI?
A high DTI might make things more complicated, but it's not a deal-breaker.
Forgiving Loans: Some home loans, like FHA and VA loans, accept higher DTIs. FHA loans can go up to a 50% DTI, and VA loans are often the most lenient.
Co-Signer: A co-signer can help get around a high DTI. Lenders will take into account both your incomes and debts, improving your chances of getting a loan.
Reducing Your DTI
While a high DTI can feel overwhelming, there are strategies you can use to bring it down.
Pay Off Debts: Make a plan to start paying off your smallest debts. Try to reduce non-essential monthly expenses like gym memberships or entertainment subscriptions.
Spend Less: Keep track of your spending habits and see where you can cut back.
Earn More: Increase your monthly income with more work hours, a side gig, or a promotion.
Cash-Out Refinance: Use your home equity to pay off outstanding debts and reduce your DTI.
Debt Consolidation Loan: Consolidate your loans into one payment, which can often be lower than the sum of your previous payments.
Is Debt Consolidation Possible with High DTI?
While it's rare, some lenders do offer debt consolidation loans to those with a high DTI. You might face higher interest rates, but a co-signer can help balance this.
Remember, a high DTI isn't a life sentence. With discipline and the right strategies, you can reduce your DTI. Our mortgage experts at NorthPort Funding are ready to help you navigate the path to a mortgage you can afford. It's time to start your journey towards homeownership!