What You Should Know About Your Debt-To-Income Ratio
Your debt-to-income (DTI) ratio is
the percentage of your monthly income that you spend on debt payments. Lenders use your DTI to decide whether to give you a loan and how much you can afford to borrow.
A high DTI means you might not be able to afford a loan or have to put up collateral, such as a car or house, to get one. A low DTI shows that you can manage your debt and still have money for other expenses.
Understanding Your DTI Ratio
Lenders use your DTI to help them decide whether or not to give you a loan. A high DTI means that you may have trouble making your monthly payments, while a low DTI indicates that you're more likely to be able to make your payments on time.
DTI is not the only factor determining whether you qualify for a loan. Other factors that will be considered include your credit score, employment history, the size of your down payment, loan term, and financial assets.
To calculate your DTI ratio, divide your total monthly debt payments by your gross monthly income. The result is your DTI ratio percentage.
A Desirable DTI Ratio
A good DTI ratio means your total monthly debt payments shouldn't be more than 42 percent of your monthly income. This is just a general guideline, though, and some lenders may have different requirements.
A lower DTI ratio means you have more money coming in than going out in terms of debt payments. This leaves you with more money to cover other expenses like utilities, savings, and entertainment.
Additionally, a lower DTI makes it more likely that you'll be able to take on additional debt in the future if needed. A high DTI ratio means you are using a large portion of your income to pay off debts, leaving less money available for other expenses or to take on additional debt.
The DTI ratio is a number that represents how much of your income is being used to pay off debts. A high DTI ratio means it is difficult to manage your finances and may be a sign that you are in a difficult financial situation.
Understanding this is important because the lender wants to ensure you can afford the mortgage payments and will use your DTI to help them make that determination. They don't want to have to foreclose on your home, so they will use your DTI to make sure you can afford the loan.
What the Limits of the DTI Ratio Are
Your DTI ratio is a good measure of your financial health, but it doesn't tell the whole story. It doesn't take into account factors like the type of debt you have (such as high-interest credit card debt vs. low-interest line of credit). This means that your DTI ratio doesn't account for your other monthly expenses, so it might give you a false sense of how much debt you can afford to pay back.
THE BOTTOM LINE
Your debt-to-income (DTI) ratio is the percentage of your monthly income that goes toward paying your debt. Knowing your DTI ratio is essential because lenders use it to determine whether you qualify for a loan and how much you can afford to borrow.
A high DTI ratio can make it difficult to get approved for a loan and may also mean you’re carrying too much debt. Most lenders prefer that your DTI ratio be 36 percent or less, but some will go up to 50 percent. If your DTI ratio is too high, you may need to work on paying down your debt or increasing your income before you can qualify for a loan.
Are you looking for mortgage financing in Canada? Level Up Mortgages makes it easier for new buyers, real estate investors, and even the self-employed to find the funding they need. If you are looking for conventional or private lending in Canada, get in touch with us today!
See what you qualify for or contact Paul to get your pre-approval.
Paul Davidescu (www.levelupmortgages.com)
Level Up Mortgages
604-809-3188
paul(at)levelupmortgages.com
See Our Google Reviews in BC & Ontario: bit.ly/GoogleReviewLUM ⭐️⭐️⭐️⭐️⭐️