Understanding Your Debt-to-Income Ratio When Getting a Loan

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It’s normal for potential home buyers to carry a certain amount of debt, but the amount you owe can affect your chances of being approved for a home loan. Your lender will look closely at your debt-to-income ratio, or DTI, when deciding whether or not to approve your loan.

What exactly is this ratio? DTI refers to how much you owe compared to how much money you make. Your lender will take monthly expenses, such as your car loan, credit card payments and student loan payments, into consideration. They’ll also include the cost of your home loan and title, as well as fees for a home appraisal, credit reports and a home inspection, when factoring your DTI. Many lenders want your DTI to be less than 45 percent, although the standard is more like 38 percent. You might be able to get away with a 41 percent DTI if you have a solid income and good credit history.

If your DTI is too high, you’ll need to work on bringing it down in order to increase your chance of being approved for a home loan. You can do this by paying off as much debt as possible, especially if you’re carrying credit card balances. This will lower your debt-to-income ratio and boost your credit score, which means you could end up being approved for a loan with a lower interest rate.

For more information on managing your finances prior to buying a home, click here. And for more expert advice, contact an ERA Real Estate professional in your market.

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