Your DTI, or Debt-to-Income ratio is the calculation used by mortgage lenders to determine how much house you can afford. To calculate DTI, just divide all your ongoing monthly debt payments by your monthly income.
“Ongoing debt payments” would be things like credit cards, student loans, and other financed purchases (like that Peloton you’re financing with Affirm).
Let’s look at a simple example. Let’s say you have the following monthly debts:
Credit Card Monthly Minimum Payment = $100
Car Lease = $400
Peloton Payment = $80
Total Monthly Debts = $580
Let’s also say your net income is $5,000 per month. Therefore, your DTI is $580 / $5,000 = .116 or 11.6%.
To see how much house you can afford, lenders will add in the expected mortgage amount to see how that affects your DTI. Each lender has a different DTI requirement. Our preferred lender, for example, requires DTI to be 50% or less. Other lenders that are more lenient might allow for higher DTI ratios. This is why sometimes you can qualify for a higher amount depending on which lender you talk to.
So to expand on the previous example, let’s say you’re hoping to purchase a $350,000 home, you’re able to put 10% down, and interest rates are at 5%. Your 30-year mortgage payment, then, would be $1,690.99.
Adding this to your previous debt total, your total monthly debts are now $2,270.99. Your DTI is now 454 or 45.4%.
If the Lender ABC allows DTI up to 50%, then you’ll get approved for the $350,000. However, if the lender set their DTI requirement to 40%, then you’ll have to settle for a smaller purchase price.