DTI is an abbreviation for your “Debt To Income Ratio.” If you are house hunting or preparing to find a good mortgage package, then you might have heard this term from a banker or your financial planner. Today, the Palm State Mortgage Company will explain this phrase and its importance to your household budget, as you plan to become a homeowner. We hope to completely demystify this simple financial term.
1. Your DTI is a calculation which demonstrates how much of your income is spent paying your debts. In this case, we simply want to know how much of your income will be absorbed by the mortgage payment, insurance and taxes.
2. Keep in mind that the higher one’s debt to income ratio, the more of their monthly income that is solely devoted to paying back debts, and in this case, mortgage debt.
3. Any financial planner will tell you that it is very important for you to budget your DTI because the number is used by many institutions, when they decide if you are credit-worthy.
4. The magic formula: To find your DTI you will divide the monthly payments of your dream mortgage, taxes, insurance by the amount of your monthly income. The resulting percentage is your DTI, and if your percentage is to high, it could indicate that you would have a difficult time paying your debts, if your dream house mortgage is realized.
5. A Simple Example: By referring to Greg Mcgraime, financial planner, and author of the audiobook “Get Smart About Investing,” we can find a simplified example of this financial tool.
A. Your dream mortgage situation requires a 2000.00 per month payment.
B. Your income is 5000.00 per month.
C. Dividing your proposed payment by your income gives you a percentage amount of 40 percent.
Think about it; that is a large percentage of your income to dedicate to a place to live.
This means it certainly could become difficult for you to make your mortgage payments if you had any kind of family financial emergency like sickness or job loss.
Likewise a high DTI could lead your lender to decide you were a poor risk, and he or she would become disinclined to make the loan.We are not saying they would not give you the loan, but remember that the lender might have his own agenda and grant you the loan, although he knows it will be a hardship.
D. A Golden Threshold: Mcgraime advises you to look for a loan payment that does not exceed 28 percent of your monthly income.
So you might search for a dream house with a smaller price tag, until your income expands. Other experts allow you to go as high as 36 percent, but state that “the lower it is, the greater the chance you will be able to get the loans or credit you seek.” If you did not previously comprehend the value of knowing your DTI, we hope you have now enriched your understanding of how much mortgage debt you should accept without getting into debt over your head, so to speak.
Just as your grandmother or grandfather might have told you, it is not wise to sign papers you do not understand, we advise you to study the vocabulary of personal finance just as meticulously as you explore the house and neighborhood you want call “home.” At Palm State Mortgage Company, we believe people are getting smarter about their finances. We know you can avail yourself of various financial help books, and there are numerous library and college courses on the subject.
If you are considering a home loan, it does no harm to sharpen your vocabulary by reading websites such as U.S. News and World Report, A quick visit at that resource will show you the multiple resources available for financial planning in the twenty-first century.
To spin-off a popular old commercial, we say, “Financial vocabulary? Don’t leave home–or find a home–without it!” We also would be remiss if we did not suggest you check with Palm State Mortgage; we will help you find the perfect mortgage package to fit your DTI, and your pocketbook.