Your debt-to-income ratio can make a great deal of difference in your ability to buy a house. It can help you gauge how much home you can afford. It can factor into your chances to secure a loan. It can help you figure out where you need to focus your efforts on improving your credit and financial health.
What Is a Debt-to-Income Ratio?
Your debt-to-income ratio is a calculation that measures how much you spend against how much you bring in. It's expressed as a percentage. The lower the percentage, the better your financial situation.
How to find your DTI percentage
To figure out your DTI, you have to calculate your monthly expenses, then divide that number by your household's monthly income. Turn that result into a percentage, and you'll have your DTI. For example, consider if you brought home $4000 each month, but pay $2000 in bills and other debt each month.
2000/4000=0.5 and 0.5=50% (you can use a DTI calculator)
That would give you a DTI of 50%. Half of your income goes towards debt each month. Your goal, before looking to buy a home in any location, is to lower that DTI as much as you possibly can.
How to Lower Your DTI
Lowering your DTI means lowering your monthly debt. It's one of those things easier said than done, but there's a few ways to start the process.
Cut out or try to lower any monthly bills
If you're paying for a subscription to a service that isn't really necessary, then consider cutting that service. For example, consider cutting out your full cable package to one that only includes the channels you actually want. Or, cut the cord completely.
See if you can find an equivalent cell phone and data plan on a cheaper service. Take stock of what you're paying for. Cheaper solutions and alternatives may exist.
Make extra money
If possible, pick up a part-time or weekend job to increase your income. You can consider starting a home business or any other of the numerous ways to make money online these days. Keep in mind that your DTI uses your household income, not just yours. If there's other people of working age in the home, encourage them to start earning money, or more money, as well.
Deal with old debt; avoid new debt
If you're paying off a loan, or some other old debt, then attempt to pay it all off before you try to buy a house. If possible, try contacting your creditors and settle the debt for a lower amount. In addition, don't take on new debt if you can avoid it.
Each point your lower your DTI by is better for you. A high DTI can turn into higher interest rates and a higher down payment requirement. It's not the only thing that can factor into your ability to secure a loan for a new home, but it's important. Also, as you lower your DTI, you will improve other aspects of your financial situation, such as your credit score.
If you want to buy a home in your area, use these tips to understand and improve your debt-to-income ratio.
