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Allyson Hoffman's Blog

By Allyson Hoffman | Broker in Glenview, IL
  • Is Debt-To-Income Ratio Important?

    Posted Under: Financing in Illinois, Credit Score in Illinois  |  March 30, 2011 7:10 PM  |  907 views  |  No comments

    One of the first factors lenders look at when a North Shore homebuyer applies for a mortgage is the Debt To Income Ratio . This information could make the difference to whether the loan is approved or denied.  Here is information on why it is so very important to you and how it effects your lender’s financial decisions.

    Debt-to-income ratio is simply a comparison of the money you earn to the money you owe. It includes credit card debt, existing mortgages, auto loans, and any other personal debt.

    Your mortgage lender will look at your Debt-To-Income (DTI) to evaluate your ability to afford your new mortgage. You should have a good idea of what your DTI ratio is before you approach a lender or consider buying a new home.

    You ultimately want to achieve a low DTI ratio. A high number means that you have less disposable income and less ability to maintain the home once you purchase it. With foreclosures at an all-time high, lenders are not willing to assume any additional risk in lending.

    Most lenders seek DTI ratios in the 20-36% range or lower, with no more than 28% of debt dedicated to the mortgage itself. While some lenders will consider higher ratios, DTIs in the upper 30% range are considered high risk.

    There are several different calculators available online to help you determine your ratio, and you can always check with your financial institution for guidance on determining your DTI ratio.

    Here’s a simple formula:

    · Add all your monthly payments (mortgage or rent, car, credit cards, any other debt payments)

    · Add your gross income (before taxes), bonuses, alimony, or any other outside income and divide by 12

    · Then divide the total number in (1) by the final number in (2)

    · The result is your DTI ratio

    Debt-to-Income Ratio is good information for you whether you are trying to buy your Northern Illinois dream home or if you are just interested in your financial health.  Knowing your DTI and understanding ways to lower your ratio is a very smart step in starting down the road to “debt-free”. 

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