The Details Behind Debt to Income Ratio for Mortgages
The Debt to income ratio (DTI) is the measure of the debt held by a household to the amount of disposable income. DTI ratio is calculated by summing up all the debt a household has (mortgages, car loans, credit card debt, personal loans) and dividing it by the annual income (before taxed and deductions). Contact us to learn more.
Why is the Debt to Income Ratio Important?
If you follow the news and read the papers, you are likely to have encountered articles about the rising debt to income ratio among Canadian households. The latest reports indicate the DTI is as high as 174%. The Bank of Canada is concerned because a high DTI ratio will result in the suffocation of financially struggling persons in Canada. According to the bank, the amount of debt held in Canadian households has been on the rise for the last 30 years.
The DTI, however, is not only a concern for the national bank and financial institutions. You should also be concerned with your debt to income ratio for mortgage. Why? Lenders use your DTI ratio to determine if you are deserving of loans. A high debt to income ratio for mortgage shows that you are financially vulnerable and are at a higher risk of defaulting. However, having a low debt to income ratio for mortgage will make you attractive to lenders.
If you care about your financial health, then you should regulate your debt to income ratio. A high DTI ratio throughout your life will hinder you from accomplishing any of your financial goals. If you have just started your life by purchasing a property in places like Montreal, Vancouver, or Toronto, then your DTI ratio will be high for some time. However, if you pay off your debt and increase your income, the DTI ratio will decrease.
How To Calculate Your Debt to Income Ratio for Mortgage
Numerous online calculators can help you find your debt to income ratio. But you can also calculate your DTI at home with your calculator, as explained below. First, compile the full list of income and debt that you and your spouse have. If you are alone, then gather your income and debts.
- You and your spouse’s monthly incomes
- Alimony (if any)
- Child support (if any)
- Any retirement benefits
- Car loan(s)
- Any vehicles, boats, campers, or snowmobiles.
- Credit margins
- Credit cards
- Student loans
- Personal loans
- Bills- utilities, medical or any unpaid bills
John and Susan are a couple. Their total monthly income is $150,000 before taxes. They own two cars with car loans of $40,000. They also own a house with a mortgage balance of $160,000. Their credit card debt is $30,000. In total, their debt is $230,000. When we divide $230,000 by $150,000, we get a DTI of 153% or $1.53 debt for every dollar of income earned.
DTS vs. TDS
The debt to income ratio should not be confused with the total debt service (TDS). The latter is a measure of the income dedicated to income payment. The TDS ratio is a comparison of the monthly fixed debt payments to the monthly income. Usually, the TDS ratio should be below 100%. Anything higher means that the debt payments are more than the income, which is unmanageable. It is advisable to maintain a healthy TDS ratio between 40-45%, but if you can go lower, it’s better.
How To Improve Your Debt to Income Ration for Mortgage
- Pay off your debts regularly.
- Increase your income.
- Avoid using your credit card for regular purchases such as gas, groceries, and shopping.
- Consolidate your credit card debt to get a better interest rate and pay it off.
- Buy a house you can afford.
- Don’t buy recreational vehicles.
Ready to Learn More?
If you are planning to buy a house, regulating your debt to income ratio for mortgage should be one of your priorities. To find expert advice in Edmonton, contact Dominion Lending Centres today.
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