What is Debt to Income Ratio

What is Debt to Income Ratio?

What is Debt to Income Ratio and Why Should it Matter to Home Buyers? The Debt to Income Ratio, also referred to as DTI,  is the amount of monthly income that is spent on monthly debt. The DTI  Matters because it can affect loan approval.  When the monthly debt percentage is too high in relation to the monthly income, lenders will not approve loans in many cases.  Debt to Income Ratio Calculation is calculated by dividing the monthly debt by the monthly income and then multiplying by one hundred.  Many lenders will require a debt to income of no more than 35.

Good Debt to Income Ratio

A good debt to income ratio is 28 to 35, the lower of course being better. Keeping the DTI in these levels can help in getting loan approval. While there are some lenders and loan programs that will allow slightly over these amounts, many conventional lenders will not.

Debt to Income Ratio Calculation

Calculate the debt to income ratio by dividing monthly debt by monthly income then multiplying by 100.

Calculate Debt Allowance Percentage

A simplified way to look at this in order to determine your max outgoing monthly debt allowance to reach a  DTI of 35 is to multiply your monthly income by 35 percent aka 0.35.
This will let you know what your monthly outgoing allowance should be.
Example:
For a couple, let us call them Bob and Jane, both Bob and Jane work full-time jobs at 40 hours a week, so 160 hours monthly. Then multiply those hours by two for 2 people,  Bob and Jane,  to get 320 hours total monthly. Let us assume for this exercise that both Bob and Jane work at the minimum wage in Missouri of $11.15 hourly, this equals a monthly income for the couple of $3568, now multiply that by  35 % aka 0.35 , to get a monthly allowance of total outgoing debt threshold of $1248.80 .
This means that in order to have a DTI not greater than 35, Bob and Jane should try to focus on not having a total outgoing monthly debt payment over this amount. To improve DTI, Bob and Jane could either lower monthly debt or increase monthly income or both!!
Sometimes it can take a while to determine your budget for a home, to save up for a down payment for a home, to lower your Debt to Income Ratio, and to Improve Your Credit Score. Setting a timeline and making a plan to achieve these goals can help tremendously.
If you are wanting to buy a home in Howell County, but need some help with information on how to prepare to buy a home, please feel free to reach out to me at CKing@HowellCountyMissouriRealEstate.com
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