When you're delving into the market in the hopes of finding your dream home, it's likely you'll come across the term debt-to-income ratio. While it might not seem important at first, but your DTI is the key to determining the amount of money you can put into your home and how much you should spend on a monthly basis. If you're curious about what this means for you, here's how to calculate DTI and how it can impact your mortgage.
What's Your DTI Ratio?
One of the best ways to determine whether or not a home is affordable for you is to first calculate your DTI ratio. To get this amount, add up all of your monthly payments including any credit card, loan and mortgage payments Then divide this amount by your gross monthly income. The amount you get is your DTI percentage. This will help to determine how much your monthly payment should be.
What Does Your DTI Mean?
Your DTI percentage helps to determine the amount of house you can afford on a monthly basis. While a DTI of 25% or less is ideal, a DTI above 43% may make it harder to get financing since there will be little room for error. When it comes to a higher debt load, approval may come down to what your credit history says about your financial health.
The Amount Of Home You Can Afford
It's easy to be convinced that your dream home is for you and worth the splurge. But investing in too much home can lead to future financial difficulties. If you're set on a home that has a high monthly payment, you may want to hold off until you've saved a larger down payment. You can also revamp your budget so that you can make the investment work for you. It may also be worth continuing the housing search so that you have more flexibility to invest in education, travel or other things down the road.
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