How Debt-to-Income Impacts Buying a House
10 min read
Got debt, but you’re looking to buy a house? Fortunately, there’s no rule that says you must be debt-free before buying a house.
But just because you can get approved with credit card debt and other loans doesn’t mean that your debt doesn’t matter—because it does (to a degree).
Your debt-to-income ratio, or simply DTI, can impact buying a house. And in some cases, it can make or break a deal.
This isn’t meant to alarm you. But it is important to understand why DTI matters. But first, what is debt-to-income ratio?
What is DTI?
This might not be a term you hear often. But in the lending world—especially the mortgage industry—it carries a lot of weight.
To put it simply, DTI or debt-to-income ratio is the percent of your monthly gross income that you’re spending on minimum debt payments.
So basically it’s our way of assessing whether a borrower is overextended with regard to debt.
Now, of course, having a lot of debt doesn’t mean that you can’t buy a house. But it might (*harsh reality alert*) stop you from buying the home you actually want.
The goal is to make your home buying experience a positive one, and this involves determining a realistic mortgage amount.
Mortgage affordability isn’t one-size-fits all. Even so, as a general rule your monthly payment should be within 28% to 31% of your gross monthly income—give or take.
But just because a payment falls within this range doesn’t mean you can afford it. This is where DTI calculations come into play.
When an underwriter reviews a loan package, they don’t only look at the house payment in relation to income. They also calculate your overall debt payments in relation to your income. And yes, this includes the future mortgage payment.
Your overall DTI shouldn’t exceed 36% to 43% of your gross monthly income. So if you have a lot of other debt, even with a house payment within 28% to 30% of your gross monthly income, your overall DTI might be greater than the allowed limit. And if so, you’ll have to cap your house payment at a lower percentage, maybe as low as 25%.
The good news is that you can improve your DTI. To do this: reduce your consumer debt as much as possible “before” applying for a mortgage. Pay off credit cards, auto loans, and student loans, if possible.
This isn’t all, though. You can also take advantage of your marital status and apply for a mortgage with a co-borrower (if they have good credit). We’ll use your combined income for qualifying purposes.
So yeah, there’s a lot to think about when buying a house. But don’t worry, we’re here to provide the answers you need. Homeownership is just a phone call away, so contact the loan experts at Real Genius today. Ask questions, start your application, and get the keys to your future.