HomebuyingFinancial IQ December 18 2019

Homebuying Hurdle: Debt

"I have too much debt to buy a home.”

Many believe that their amount of debt will be an instant hurdle when qualifying for a home loan. This is not always true. The amount of your debt will not necessarily be a red flag to lenders, but your debt-to-income (DTI) ratio might be. This number is one way lenders measure your ability to manage your monthly payments and repay the money you plan to borrow. Understanding DTI is important, especially when you are looking to purchase a new home.

What is Debt-to-Income Ratio?

A debt-to-income, or DTI, ratio is derived by dividing your monthly debt payments by your monthly gross income. This ratio is expressed as a percentage, and lenders use it to determine how well you manage monthly debts and whether you can afford to repay a loan.

How can you calculate Debt-to-Income?

In order to figure your debt-to-income ratio, you need to determine your total monthly gross income from all sources, before taxes. Then, determine what your monthly debt payments are such as your car, credit card payments, and housing. The final step in calculating your debt-to-income ratio is to divide your total monthly debt payments by your monthly gross income and convert this into a percentage. That percentage is your debt-to-income ratio!

For example:

Monthly:
Housing: + $1200
Auto loan: + $400
Credit card payments: + $300
Monthly debt total = $1900
Monthly income gross / $5500
1900 / 5500 = .3455
0.3455(100) = 34.55
Debt ratio = 35%

Take this calculation a step further and see how much home you can afford.

Why Does Debt-to-Income Matter?

Awareness of your DTI is crucial when it comes to determining your financial standing. A good debt-to-income ratio is considered one below 35%.  According to the Consumer Financial Protection Bureau, “Evidence from studies of mortgage loans suggest that borrowers with a higher debt-to-income ratio are more likely to run into trouble making monthly payments.” Among other factors, a lower DTI ratio will make you more successful in securing a home loan. Lending companies are not the only entities that will look at your DTI. If you’re interested in applying for a credit card or an auto loan, lenders may use your debt-to-income to decide if lending you money is worth the risk.

Decreasing Debt-to-Income Ratio

Wondering how you can maintain or, perhaps, decrease your debt-to-income ratio? There are really only two factors in the above equation that will change the percentage: a higher income, or lower debt. Decreasing your credit utilization by paying down debts is the best way to decrease this number. Need help lowering your debt-to-income ratio or have questions about how your debt will impact the purchase of your dream home?  Talk to our credit specialists now.  

April 21 2021

The Just-Right House

Home sizes in the U.S. have been growing steadily over the years, and with our sudden shift to stay-at-home living, new home...

Read More

April 15 2021

How to Get a Mortgage When You're Self-Employed

Here are a few things you need to consider to land the best possible mortgage when you're self-employed.

Read More

April 07 2021

3 Surprising Refinancing Mistakes

When refinancing, be careful to avoid some pitfalls and traps that could cost you money in the long run. Here are some of...

Read More

March 31 2021

10 Unexpected Spring-Cleaning Tips

Keep your home in the best possible shape with these surprising life hacks.

Read More

March 23 2021

Tax Season Tips for Homeowners

If you're a new homeowner, you might be wondering how homeownership affects your taxes. The answer is: It depends on one big...

Read More

March 11 2021

A Virtual Homebuying Helper: Lennar Homebuying Seminars

Online webinars are making it easier than ever to help buyers get educated and take the first steps toward their dream of...

Read More

March 04 2021

What is Mortgage Insurance?

Mortgage insurance may seem like just one more painful added expense when considering buying a home and how much you can afford....

Read More

February 25 2021

What to Expect on your Path to Homeownership

Our Digital Mortgage Experience is a modern mortgage application with a personal touch! We’ve designed our Digital Mortgage...

Read More

February 18 2021

How to Get a New Construction Loan

Tips and steps for buying a new-construction home.

Read More

First23456Last

Search Results for query

November 10 2021

Pet-Friendly Remodeling Ideas

Here are a few ideas for making some pet-friendly changes to our homes to make them more fun, friendly and comfortable for our furry friends.

Read More

November 03 2021

Fall Garden Cleanup Checklist

Find out which chores to skip, which are must-dos, and how to keep your garden looking beautiful in the fall.

Read More

October 27 2021

Should You Buy a Home with Cash?

Paying upfront instead of obtaining financing is often seen as a way of getting a leg up on other potential buyers. But is it always the best idea? And why is it so common

Read More

October 19 2021

5 Ways to Make Your Offer Stand Out in a Tight Housing Market

With huge buyer demand and a shrinking inventory, this market means you'll need to be strategic, creative, and prepared in order to buy your dream house.

Read More

October 12 2021

Should I Buy a Home with an HOA?

In the excitement of buying a new home, it can be easy to overlook the presence of a Homeowners' Association, or HOA. But an HOA can have a lot of influence over your purchase choice, including your monthly payment, the money you need to set aside for...

Read More

October 04 2021

14 Brilliant Ideas for Decorating Your Porch This Fall

Simple and inexpensive solutions for a cozy, colorful porch that says "welcome."

Read More

September 23 2021

7 Surprising Things First-Time Homebuyers Should Never Do, According to Loan Officers

Loan Officers Rachel Alcaraz and Haley Aivazian share their must-follow tips for first-time homebuyers.

Read More

September 08 2021

Expand Your Living Space with the Ultimate Patio

With some creativity, DIY spirit, and a bit of a budget, you can transform your patio into a space not only that you love, but that creates value.

Read More

September 02 2021

Mistakes Sellers Make When Showing Their Home

Here are some do's and don'ts to help show your home in the most appealing light.

Read More

12345Last

Mortgage Calculators

Crunch the Numbers With Our Helpful Mortgage Calculators

Payment Calculator

payment calculator

Payment
Calculator

Affordability Calculator

affordability calculator

Affordability
Calculator

Refinance Calculator

refinance calculator

Refinance
Calculator

The Modern Digital Mortgage with a Personal Touch

Paperless. Effortless. Awesomeness TM

Simplify the home financing process with our Digital Mortgage. We'll be here to help navigate you through the entire process.

Get Pre-qualifiedWhat is a Digital Mortgage?