Other than your creditworthiness, your debt-to-income (DTI) ratio is another thing you need to worry about when applying for a mortgage. Whether you want to obtain a conforming or a jumbo loan, your prospective lenders would measure your capacity to pay with it. Plus, it can determine the mortgage rates in Salt Lake City you can qualify for.
To further advance your knowledge of DTI ratio, let’s answer the most asked questions about it:
What Is the Max DTI Ratio?
Mortgage lenders have different DTI ratio requirements, but your housing monthly payment shouldn’t exceed 36% of your monthly income. The lower your DTI ratio, the less likely you would miss your payment.
Apart from increasing how much you earn, one way to meet the DTI ratio requirements is to extend the term of your mortgage. Of course, this would mean paying for more interest over time.
What Are Front- and Back-End DTIs?
The front-end DTI ratio refers to the percentage of your gross monthly income you need to allot to cover your housing monthly payment. On other than hand, the back-end DTI ratio takes into account all of your monthly financial obligations.
According to the new Qualified Mortgage rule, the maximum back-end DTI ratio is at 43%. In other words, your monthly liabilities (debt payments) should exceed 43% of your monthly income. Despite the limit, most lenders would want to see your back-end DTI ratio to be below 43%.
How to Calculate Your DTI Ratio?
To figure out your current DTI ratio, get your average annual gross income based on your past two tax returns and divide it by 12. Then, add up your projected housing monthly payment and your other liabilities, and divide the total by your average gross monthly income.
If the number exceeds the maximum back-end DTI ratio allowed, don’t fret. You can lower your DTI ratio by paying your other debts off, pay a larger down payment to borrow far less money, or consider a more affordable property to buy to reduce the size of mortgage you need and decrease your potential housing monthly payment.
Put a premium on your DTI ratio to qualify not just for the kind of mortgage you want, but also for a favorable interest rate. If you can keep it as low as possible before speaking with your prospective lender, you can put yourself in a good position to negotiate a great deal.