Q:What does DTI stand for?
A:DTI stands for debt-to-income. This is a ratio used by lenders to determine if a borrower has enough income to pay his debts, including the new loan payment. The DTI is calculated by taking the borrower’s total debts and dividing them by his total income.
DTI Calculation Example
New Mortgage $1,200 per month
Visa Credit Card $50 per month
Car Lease $250 per month
Student Loan $75 per month
Child Support Payment $200 per month
Total Debt Monthly Payments: $1,775
$4,800 per month salary
The debt-to-income ratio (DTI ratio) is calculated as follows:
$1,775/$4,800 = 36.98 percent
36.98 percent of the borrower’s income is used to pay his debts.
What is a good DTI?
If you have a very low DTI ratio, this means that you have ample income to cover your debts on a monthly basis. The risk of default is typically reduced when a borrower has a low DTI. A DTI below 36 percent is generally considered a good DTI as it is a signal that a borrower has plenty of income to cover his debts. As a reference, the maximum DTI to obtain a conforming mortgage is typically 45 percent and in some cases 50 percent. There are exceptions to these DTIs for certain loan programs.
How To Lower Your DTI
The DTI consists of debt and income. You either have to lower your monthly debts or find a way to increase your monthly income to lower your DTI.
If you wish to lower your debt, you obviously have to pay off your debt. Once you pay off a debt, the monthly payment is eliminated and is no longer counted against you in your DTI. Additionally, sometimes a monthly debt payment is reduced when the balance is paid down. If you pay off or pay down a debt, the mortgage lender (underwriter) may request the source that you used to pay off a debt. Be prepared to document the source of funds used to pay off a debt if it was paid around the time of a mortgage process. Note that rent is commonly not included in your DTI ratio if you are moving out of the rental property (i.e. your lease has ended) and obtaining a mortgage to occupy a new residence.
Increasing income will also lower the DTI ratio. This may mean taking on a second job or working overtime. However, lenders often want to see a solid history of earning this type of income in order for it to be considered in the DTI. If you pick up a new part-time job (in addition to your full-time job) a few weeks before you apply for a mortgage, you should not expect the lender to include this income in your DTI. You would lack a history of receiving this type of income for it to generally be considered.
Things to Consider
It is always a good practice to keep your debts in check. You should strive to live within your means and have sufficient income to cover your monthly debts. Ideally, you should have some money left over at the end of the month to save after paying all your expenses. Ultimately, your DTI provides a good indication of your current financial situation.
While lenders like to see a low DTI, it does not always mean that you will not qualify for a loan with a higher DTI. A loan professional such as a loan officer should be able to provide you guidance on whether your DTI and other loan factors are solid enough to obtain a loan. If you do not qualify for a loan, the loan officer can often advise you on the steps you need to take to potentially receive a future loan approval.