What Should Your Debt to Income Ratio Be to Qualify for a Mortgage?
If you are looking to buy a home, you have probably heard about a debt to income ratio for a mortgage. This is one of the many parameters that a lender will use to assess if you will be able to pay back on a mortgage easily enough. There is no official perfect number for this amount, and it will depend on your situation, including your credit rating and what type of debts you currently hold.
Debt to Income Ratio for Mortgage Calculation
The calculation is pretty simple; your lender will take all of the monthly debt payments you make and add them up, debt = D, your total monthly income = I, and X = the amount of the monthly mortgage payment they think you can handle.
(X + D)/I x 100% = Debt to Income Ratio
If you want a $300,000 home, your mortgage payments will be in the ballpark of $1,500 per month. Let's say you paid off all of your student loans; have a balance of $5,000 on a credit card with a minimum payment of $150; and you also have a car loan that costs you $250 a month. In this case: X is $1500; D is 400, and X + D is $1900
In Canada, banks will usually accept a debt ratio up to 42% or 44% if you have really good credit. Different banks have different rules, making the knowledge of an experienced mortgage broker extremely valuable. Based on the debt load above, if you make $60,000 per year ($5000 monthly), then the formula looks like this: $1900 / 5000 X 100 = 38% Debt to Income Ratio. Generally, if you have good credit and the above formula matched your financial situation, there would be a good chance that you will get approved for the $300,000.
If you or your household only made $45,000 per year ($3750 Monthly), then the formula looks like this: 1900 / 3750 X 100 = 50.67%. A debt ratio of 50.67% would not get approved by a bank that had a maximum debt ratio policy of 44%. Basically, a debt ratio this high would mean that in the eyes of the bank, you cannot afford the payments and have money left for other living expenses. Your debt to income ratio is too high.
What if I Have a High Debt to Income Ratio?
Your best bet to lower your debt to income ratio is to start paying down your debts. Pick off the smaller balances first, then start to work on the larger ones, starting with the ones with the highest interest rates.
Earning a higher income will also be helpful in lowering the debt ratio. Doing both will have you in your own home in no time!
Dominion Lending Centers can help you get into your own home, contact us today!Request Mortgage Info