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.  

July 23 2021

5 Top Features Homebuyers Want in 2021

The past year of stay-at-home life has changed the way we live and think about our homes, and those changing priorities are...

Read More

July 21 2021

Is an FHA Loan the Best Choice for You?

There's more than one path to homeownership and a variety of home loan products that can help make it happen. One of those is...

Read More

July 14 2021

2021 Home Renovation Trends

This year, home remodeling dollars are flowing toward projects that improve our health, increase our privacy, boost our mood and...

Read More

July 07 2021

6 Surprising Ideas for an At-Home Staycation

Here are some ideas to help make your time staying close to home, time well spent —without spending much.

Read More

June 30 2021

4 Long-term Strategies for Paying Off Your Mortgage

How to save time, money and pay off your loan in a way that makes sense for you.

Read More

June 23 2021

3 Things You Should Never Do If You're Getting Ready to Buy a Home

Here are some of the top mistakes you should never make before you buy a home.

Read More

June 16 2021

Pest-proof Your Home and Yard for Summer

Here are some tried-and-true strategies for keeping bugs and other pests at bay during the summer months

Read More

June 09 2021

4 Ways to Weatherproof Your Home for Summer

How to inspect, repair, and get your home ready for warmer months

Read More

June 03 2021

Budget-friendly Outdoor Entertaining Hacks

Host a fab get-together without breaking the bank with these budget-friendly outdoor hacks.

Read More

12345Last

Search Results for query

September 24 2020

Conforming vs. Nonconforming Loans

When financing your new home, there are just a few things you need to know about the types of loans you might be choosing from.

Read More

September 16 2020

Online Closing Options: Closing Faster, Smarter, Safer

Health concerns, purchasing out of state, or other life interruptions can make closing in person difficult — and that’s why we’ve created two new options for borrowers, our Eagle Express Close and Remote Digital Closing Experiences.

Read More

September 02 2020

6 Cheap and Easy Ways to Increase Your Home Value With Curb Appeal

There are several affordable, DIY curb appeal options to increase your home value that can get you some serious sweat equity.

Read More

August 25 2020

6 Pieces To Brighten Up Any Room

Lighting and fixtures we use in our homes can be utilized to reflect our mood and create ambiance. This can be done by understanding the types of lighting, how they can be used and what mediums they best compliment.

Read More

August 03 2020

Laura Escobar Named 2020 Woman of Influence

Eagle Home Mortgage President Laura Escobar has been named one of HousingWire’s Women of Influence 2020.

Read More

July 28 2020

6 Surprising Ways to Spend Smarter for Back to School

This year, many of us have a different picture of back to school shopping. With some savvy financial planning, you can keep expenses in check and still help your kids be ready to learn.

Read More

July 21 2020

Plan Ahead When Buying Your Next Home

Thinking ahead will ensure your next home is one you can enjoy for years to come.

Read More

July 14 2020

Stop Making Your Landlord Rich!

Many renters don’t know how easy it may be to purchase a new home, nor realize their mortgage payments could actually be equal (or less) than what they’re spending monthly in rent.

Read More

July 07 2020

Start the Mortgage Process Early & Reduce Stress

Just because your home is not finished being built, doesn’t mean you should leave the mortgage process for the last minute.

Read More

First34567Last

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?