When applying for a mortgage, lenders assess several factors to determine your eligibility, and one of the most important is your Debt-to-Income Ratio (DTI). This simple calculation gives lenders insight into your financial health and your ability to manage monthly payments alongside your existing debts. Understanding your DTI ratio can not only improve your chances of getting approved but also help you better plan for your future financial commitments. Let's break this down step by step to help you calculate your DTI easily.

What Is Debt-to-Income Ratio?

Your Debt-to-Income Ratio (DTI) represents the percentage of your per month income that you spend on paying off debts. Lenders use this metric to assess how risky you are as a borrower. A lower ratio shows that you have a good, manageable level of debt relative to your income, making you a better reliable candidate for a mortgage.

How to Calculate Your DTI Ratio

Calculating your DTI is a very simple process. Follow these simple steps:

1. List Your Monthly Debt Payments 

Write down all the fixed monthly payments you owe. Let’s say you have the following monthly debts:

• Auto loan: $300
• Credit card payment: $200
• Student loan: $400
• Rent: $1,200

Your total monthly debt would be $2,100.

2. Determine Your Gross Monthly Income

Your gross monthly income is the total amount you earn before taxes and deductions. Include all income sources such as salary, bonuses, commissions, or rental income. For instance, if you earn $5,000 per month, that’s your gross income.

Tips to Improve Your DTI Ratio

If your debt-to-income ratio is above the recommended range, don't worry! There are steps you can take to reduce it.

1. Pay Down Debts: Focus on reducing high-interest debts such as credit cards, to lower your monthly obligations.
2. Increase Your Income: Consider having a side hustle or negotiating a raise at work to boost your gross income.
3. Avoid New Debts: Do not opt for any additional loans or buy too many credit card debt before applying for a mortgage.

Your Debt-to-Income Ratio is essential for your mortgage application. By understanding its calculation and managing your debts and income, you can boost your chances of getting a home loan. Before applying, calculate your DTI and find ways to improve it.

Purchasing a home is a significant step and understanding your financial situation will make the process easier. Ready to take the first step? Start calculating your DTI today!