What is Debt to Income Ratio and Why Does It Matter?

Dated: February 8 2023

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Debt-to-Income Ratio (DTI) is a critical factor in determining your ability to buy a house. It represents the percentage of your monthly income used to pay off debts. A high DTI can make it difficult for you to qualify for a mortgage, and can also mean a higher interest rate. Here are some tips to help you fix your DTI prior to buying a house.

 

  1. Pay off debt - The most straightforward way to reduce your DTI is to pay off debt. Make a budget and prioritize paying off credit card debt, personal loans, and other high-interest debt. You can also negotiate with your creditors for lower interest rates or a repayment plan that works for you.

 

  1. Increase your income - Another way to reduce your DTI is to increase your income. You can do this by getting a higher-paying job, working overtime, or starting a side hustle. Increasing your income will help you pay off your debts faster and also give you more disposable income to put toward a mortgage payment.

 

  1. Refinance high-interest debt - If you have high-interest debt such as credit card debt, consider refinancing it with a personal loan or a balance transfer card with a lower interest rate. This will lower your monthly payments and make it easier for you to pay off your debts.

 

  1. Avoid taking on new debt - While you are working on reducing your DTI, avoid taking on new debt. This includes using your credit cards, taking out personal loans, or leasing a new car. Stick to your budget and avoid making any big purchases that will increase your debt.

 

  1. Consider a longer loan term - When you are shopping for a mortgage, consider a longer loan term. This will lower your monthly payments and reduce your DTI. Keep in mind, however, that a longer loan term will also mean you will be paying more in interest over the life of the loan.

 

  1. Get pre-approved for a mortgage - Getting pre-approved for a mortgage is a great way to know how much you can afford to spend on a house. This will also give you an idea of what your DTI needs to be in order to qualify for a mortgage. A pre-approval also shows sellers that you are a serious buyer, which can be an advantage in a competitive housing market.

 

  1. Work with a financial advisor - If you are struggling to reduce your DTI, consider working with a financial advisor or coach. They can help you create a budget, find ways to increase your income, and come up with a plan to pay off debt. A financial advisor can also help you understand your credit score and how it affects your ability to get a mortgage.

 

In conclusion, fixing your DTI prior to buying a house is important because it can make a big difference in your ability to get approved for a mortgage and the interest rate you will receive.  By following the steps outlined above, you can improve your DTI and increase your chances of buying the house of your dreams!

Remember, the process of improving your DTI can take time, so start as soon as possible.  By following these steps and being patient, you can achieve your goal of home ownership and build a solid financial foundation for your future!  As always, if you would like to discuss this topic (or any others) any further, feel free to contact us!  We would love to hear from you!

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Billy Daniel

After investing in real estate for several years, I decided to get my real estate license so that I could more directly help others navigate the exciting, and sometimes frustrating, world of real esta....

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