As you’re preparing to buy a home, it’s a great idea to understand how to calculate your DTI, because this gives you a clearer picture of your finances and how much you can afford as far as a monthly mortgage payment.
In simplest terms, your Debt-To-Income Ratio (DTI) is just what you owe each month divided by your gross monthly income.
But there are actually 2 Debt-to-Income Ratios to keep in mind:
1) Housing Expense DTI
2) Total Obligation DTI
- Understand how to calculate both your Housing Expense DTI and your Total Obligation DTI
- Know what the ideal DTI ratios are when buying a home
- Use the ideal Housing Expense DTI to get a rough estimate of what you can afford as far as a monthly mortgage payment
- Learn why you should not disqualify yourself before speaking to a mortgage advisor
How can I determine how much I can afford? (Hint: Your Housing Expense DTI!)
Understanding your Housing Expense DTI can give you a rough estimate of how much you can afford when buying a home.
Your Housing Expense DTI looks at the monthly cost of your mortgage (IE housing expense) and divides that by your gross monthly income.
Housing Expense DTI = Total Monthly Mortgage Bill / Gross Monthly Income
Generally, it’s ideal to keep one’s Housing Expense DTI at around 28% or lower.
However, if your Housing Expense DTI is a bit higher than 28%, that does NOT necessarily disqualify you from buying a home.
Let’s break this down with an example!
In this example, your gross monthly income (before taxes are taken out) is $6000.
Let’s say you’re looking to buy a home and want to find out how much you can afford as far as a total monthly mortgage payment (which includes principal, interest, taxes, and insurance).
To get a rough estimate of your monthly Housing Expense budget, take the ideal Housing Expense DTI (28%) and multiply that by your gross monthly income.
28% X $6000 = $1680
Keep in mind, this gives you a rough estimate of what you can afford for a monthly mortgage bill.
It’s definitely a great starting point, but we strongly recommend you speak to a mortgage advisor for more personalized advice and guidance on this.
But what about my Total Obligation DTI?
Your Total Obligation DTI takes your monthly housing expense plus ALL your monthly debts into account.
Here’s an example:
Let’s say your total monthly mortgage bill is $1680, you have a credit card with a minimum monthly payment of $50, a car payment that’s $300 per month, and you have student loans with a minimum monthly payment of $75 per month.
And those are ALL your monthly debts. This is not taking into account other expenses such as groceries, utilities, shopping or entertainment.
Take that mortgage bill of $1680 + $50 credit card minimum payment + $300 car payment + $75 minimum student loan payment.
So your housing expense plus other monthly debts comes out to $2105.
Divide $2105 by your monthly gross income of $6000
And that brings your TOTAL Obligation DTI ratio to 35%
$2105 / $6000 = 35%
An ideal Total Obligation DTI is around 36% or lower. However, if your Total Obligation DTI is higher than 36%, that does NOT necessarily disqualify you from buying a home.
Reminder: Do NOT Disqualify Yourself!
Calculating your Housing Expense DTI and your Total Obligation DTI is a big factor in reviewing your finances before you buy a home.
However, you should NOT disqualify yourself before speaking with a professional beforehand.
- Guidelines do change over the years, so your mortgage advisor should have the most updated information to help you.
- No home purchase is one-size-fits-all. There are many different factors that come into a play – oftentimes on a case-by-case basis.
- There may be a local program, grant, or some missing piece of the puzzle that helps you qualify for something that you didn’t even know was possible!
Part of your mortgage advisor’s job is to do the calculations FOR you and make sure you don’t get wrongfully disqualified for a program that can really help you.
If you’re concerned or have any questions about your DTI, make sure to talk to your mortgage advisor to truly understand ALL your options.