What Does Your Debt to Income Ratio Need to Be for a First Time Home Buyer

Your debt to income ratio, or DTI, is an important metric used by lenders in determining your ability to repay a mortgage and what amount you can borrow. This ratio calculation of the percentage of your pre-tax, or gross, household income goes toward car loans, credit cards, personal loans, and other debt payments. The lower your debt to income ratio, the more likely you are to qualify for a mortgage at a low interest rate. The higher your debt to income ratio, the higher your chances of being charged an extremely high interest rate or denied a mortgage altogether.

What Does My Debt to Income Ratio Need to Be to Qualify for a Mortgage?

Most traditional lenders, such as the "big banks," look for a debt to income ratio of 36 percent or less. This means that if your gross household income is $100,000, you should have no more than $36,000 in debt. It's important to keep in mind, however, that this ratio is simply a benchmark and not a full measure of how much home you can afford. Your debt-to-income ratio doesn't take into account expenses like groceries and utilities, for example. Lenders may not include these monthly expenses in their calculations and may approve you for a much higher mortgage amount than you can comfortably afford.

How Much Home Can I Really Afford?

Another important consideration when determining how much you're willing to pay each month is whether you'll still be able to afford your mortgage payments if interest rates rise. While lowering your debt to income ratio doesn't directly impact your mortgage interest rate, reducing your debts will help ensure you'll still be able to make your mortgage payments if interest rates have gone up by the time you're ready to renew.

Your DTI plays an important role in your ability to qualify for a mortgage at your preferred interest rate. Contact us for assistance in calculating your debt to income ratio and determining home you can afford to buy.