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Mortgage Terms in Layman’s Terms: What Exactly is Debt to Income Ratio?

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Mortgage Loan AgreementDebt to Income ratio (DTI) is precisely what it sounds like. It’s how much debt you owe in comparison to your income. Lenders use this ratio to figure out whether a borrower is capable of maintaining mortgage monthly payments. They use DTI for purchase loans, including refinancing, as well.

DTI could likewise help you determine how much you can afford for a house deposit. Take note that DTI doesn’t measure a person’s willingness to pay, only the potential economic burden of a monthly mortgage payment.

Debt to Income Ratio Explained

Every single working person knows this scenario all too well:

Each month you try to figure out how much money you could keep and how much money you have to pay for all sorts of bills. You have regular bills for electricity and water, perhaps for your Internet and mobile phone, as well transportation costs and groceries. In addition, there’s money you need to pay off your debts — your mortgage, credit card, personal loan, or student loans.

Do you feel that sometimes all your available cash goes into repaying your debts? This means that your debt to income ratio might be too high for you to handle, says money experts and mortgage brokers in Sandy. Put simply, your DTI is a specific number expressing the link between your overall debts each month and your monthly gross income.

How Can You Calculate Your DTI

To calculate, you divide your total monthly payments for all your debt by your monthly gross income. For example, let’s say you put in $400 monthly for student loans and $1,600 monthly on your home loan. This means that you pay off $2,000 for your debts monthly. Your monthly gross income is the amount of your earnings before deductions and taxes — let’s say it’s at $6,000. This means that your debt to income ratio is 33%.

Your DTI is a critical measure of a borrower’s financial security. You increase your chances of securing a mortgage with a better rate if you have a low debt to income ratio. Likewise, a low DTI would allow you to take more financial risks and deal with them better.

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