Debt-to-Income - Why is it Important?

Stephaine Crain of Mountain Retreat Realty Experts is back to talk about Debt-to-Income.   Debt-to-income ratio (DTI) is one of the most important factors lenders look at when deciding if you can afford a mortgage. It tells them how much of your monthly income already goes toward debt payments and how much room you realistically have left for a mortgage.   ⸻   What DTI Means • DTI = Total Monthly Debt Payments ÷ Gross Monthly Income • Expressed as a percentage.   👉 For example: If you make $6,000 a month before taxes and already spend $1,800 on debt payments (car loan, student loan, credit cards, etc.), your DTI is: $1,800 ÷ $6,000 = 30%   ⸻   Two Types of DTI Lenders Use 1. Front-End Ratio (Housing DTI) • How much of your income would go just to your house payment (mortgage, property taxes, homeowners insurance, HOA fees if applicable). • Typically lenders like to see this at 28% or less of your gross monthly income. 2. Back-End Ratio (Total DTI) • Includes your housing payment plus all other monthly debts (car loans, student loans, credit cards, personal loans). • Most lenders want this at 36% or less, but conventional loans may allow up to 43–50% depending on your credit score, down payment, and reserves.   ⸻   Why It Matters When Buying a Home • Qualifying Amount: Your DTI directly impacts how much house you can afford. A lower DTI = higher borrowing power. • Loan Approval: Even with great credit, a high DTI can get your loan denied because lenders worry you’ll struggle with payments. • Interest Rates: Some lenders offer better rates if your DTI is low, since you’re considered less risky.   ⸻   Quick Example • Income: $5,000/month gross • Car loan: $400 • Student loan: $250 • Credit card minimums: $150 • New proposed mortgage payment: $1,400 (includes taxes/insurance)   Total Debt Payments = $2,200 DTI = $2,200 ÷ $5,000 = 44%   That’s right on the edge — you might qualify with some lenders, but you’d likely get a smaller loan amount or need to lower debt to qualify more comfortably.   ⸻   ✅ Rule of Thumb: • Keep housing costs ≤ 28% of income. • Keep total DTI ≤ 36–43% (depending on the loan program).  

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