Home Loan Eligibility – Understanding Your Debt-to-Income Ratio

When considering your eligibility for a home loan, lenders will consider many factors. One of the most important is your debt-to-income ratio (DTI). This figure, expressed in a percentage, indicates how much of your income goes toward your monthly debts.

The lower your DTI, the better – and while having a high DTI doesn’t mean you can’t get approved for a home loan, it does limit your mortgage options. Here’s what you need to know.

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Front-End DTI vs. Back-End DTI

When considering a home loan application, lenders look at two types of debt-to-income ratios.

Front-end DTI refers to the percentage of income that will be allocated to housing costs. This includes the monthly mortgage payment, homeowners insurance, property taxes and any homeowners association fees.

Back-end DTI shows the portion of income necessary to handle all monthly debt payments. This figure includes the above-mentioned housing expenses along with auto loans, credit cards, child support, alimony, personal loans and all other recurring debt obligations.

Mortgage lenders will look at both your front-end and back-end DTI, but most focus on the latter because it offers a more complete view of your entire debt load.

What is a Good Debt-to-Income Ratio?

To get approved for a home loan, you’ll need a DTI that is favorable to mortgage lenders. Each lender may have their own DTI criteria, but here’s how most look at the numbers:

If your DTI is 20 percent or lower – You’re in a good position to finance a home, as mortgage lenders consider that to be an excellent DTI.

If your DTI is between 20 and 36 percent – Your monthly debts are manageable and lenders will see that you may have room in the budget for another financial obligation.

If your DTI is between 37 and 50 percent – You’re doing OK financially, though some lenders may ask for additional proof of your debt repayment ability.

If your DTI is 51 percent or higher – You’ll likely be seen as a high risk borrower, and most lenders will deny your home loan application.

Keep in mind, though, that a high DTI doesn’t automatically disqualify you for a mortgage. Lenders review several factors, including your credit score, assets, down payment and property value, when determining home loan eligibility.

How to Calculate Your Debt-to-Income Ratio

Calculating your DTI is relatively easy – just take the following steps to figure it out:

Add up the minimum monthly payments for all of your recurring and required debt obligations

Ascertain your total monthly gross income, the amount before taxes and deductions are taken out

Divide the total of your monthly debts by your gross monthly income, then convert the result to a percentage

For example, let’s say that your monthly debt obligations add up to $1,100 and your gross income is $2,900 per month. Dividing 1,100 by 2,900 equals 0.38, which means your DTI would be 38 percent.

Would you like to get a Utah mortgage interest rate quote? Or are you ready to apply for a home loan? The friendly and knowledgeable mortgage brokers at Intercap Lending, serving northern Utah, are here to help. To learn more about debt-to income ratios and home loan eligibility, get in touch with us today.