This week we’ve discussed what a debt to income ratio is, how to calculate it, and what monthly obligations are included in it. Now that you can calculate your debt to income ratios you should know what it means to lenders. The following percentages explain how they will assess it on your mortgage loan application.
A debt to income ratio of 36% or less is considered to be a healthy and managable debt load for a borrower to carry. If you credit history is strong and you have a DTI of 36% or less a lender will feel confident in financial ability to make your monthly payment.
37%- 43%:
A debt to income ratio between 37% and 43% is still considered a good debt to income ratio, but it is most likely advisable to start lowering your monthly debt obligations. This DTI range is on the brink of overextending yourself, lenders may feel more insecure about lending to you. They may be concerned about whether or not you take on more debt and if that extra monthly obligation will cause you to not be able ot afford your monthly payments.
44%- 49%:
A debt to income ratio of 44%-49% is considered to be risky for both the borrower and the lender. Once an application has exceeded 43% DTI it no longer meets the requirements for a qualified mortgage. A lender will see this high debt to income ratio and take into account that it doesn’t include other monthly obligations such as utilities, cable, car insurance etc. They may deny a loan with a debt to income ratio this high.
50% or higher:
A debt to income ratio over 50% is a red flag to lenders. Most lenders will not approve a DTI this high. It is recommended that once your debt to income ratio is this high you should really work on aggressively paying down debt before taking on any new loans.
Where does your debt to income ratio fall? Is it at a healthy number, are you starting to approach the danger zone, or do you need to start working on reducing your monthly debt obligations? Take into account how y