Debt-to-income ratio
DTI is the personal finance measure that compares the amount of debt correlated to your overall income. So when lenders are looking at you as a qualified buyer, DTI is used as a way to measure your ability to manage payments that you make each month.
How to Calculate DTI
So here is what the lender does: they take all your major debts such as a current mortgage, student loans, auto loans, child support, credit card payments any entity that has established debt with.
Assume you have a mortgage and car payment and the rest of your debts add up to $2,000 each month and you have a gross income of $6,000.
Then they take your debt amount owed each month and divide that by your gross monthly income each month.
Knowing the Risks
So in this case $2,000 is divided by $6,000 and creates a 33% DTI. So this is cool right?
Yes it is; however, keep in mind that this number is based on gross income not after-tax income and it does not account for all other expenses that you have in your life.
Think about emergency and rainy day funds, auto and health insurance, groceries, utilities, as well as music and streaming services; just to name a few.
So the key is to look at your budget and itemize everything that's going out the door versus the income that you bring in and avoid being mortgage-poor.
It’s not fun owning a house that has no furniture in it.
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