What is a Debt to Income Ratio and why is it important? A couple of days ago I posted a debt to income(DTI) ratio formula illustration on Instagram.(Follow me @Koach_Carter)
Then it occurred to me that I may need to go more in depth about DTIs, what is considered a good or bad ratio, and why it is important.
A DTI is a combination of your monthly debt(such as loan payments, credit card payments, etc,) divided by your total gross monthly income.
Ex. (Total monthly bills $1,000/Gross Monthly Income $2,500)=.40 or 40% DTI
Why is this important? It shows the lender two things. Firstly, it provides a snapshot of how you are currently handling your debt. Secondly, is shows if you can afford or have the capacity to pay for the debt that you are applying for.
The current maximum DTI is 43% to qualify for a mortgage. This is still considered to be high risk. Ideally, you would want your DTI to be 36% or less, according to Wells Fargo.
The max threshold is slightly higher for mortgage loan approval. Generally, the maximum DTI for an auto loan is 36%.
It is always best to self underwrite and know where you stand before applying for credit. That way you know if it is a good time for you to apply or not. You will also know if you are in a position to not only be approved, but negotiate a good interest rate.
We hope this information will help you with your next auto or home purchase.