Debt-To-Income Ratio (DTI): How much can I afford as a monthly mortgage payment?

As you prepare to buy a home, understanding how to calculate your Debt-To-Income Ratio (DTI) is crucial. It helps you get a clearer picture of your finances and how much you can afford for a monthly mortgage payment.

In simplest terms, your DTI is what you owe each month divided by your gross monthly income. There are actually two DTIs to keep in mind:

1. Housing Expense DTI

2. Total Obligation DTI

Key Takeaways

• Learn to calculate both your Housing Expense DTI and your Total Obligation DTI.

• Know the ideal DTI ratios when buying a home.

• Use the ideal Housing Expense DTI to estimate your affordable monthly mortgage payment.

• Understand why you shouldn’t disqualify yourself before speaking to a mortgage advisor.

How Can I Determine How Much I Can Afford? (Hint: Your Housing Expense DTI!)

Your Housing Expense DTI gives you a rough estimate of how much you can afford when buying a home. It’s the monthly cost of your mortgage divided by your gross monthly income.

Housing Expense DTI = Total Monthly Mortgage Bill / Gross Monthly Income

Ideally, your Housing Expense DTI should be around 28% or lower. However, a slightly higher ratio doesn’t necessarily disqualify you from buying a home.

Example:

• Gross monthly income: $6000

• Ideal Housing Expense DTI: 28%

• Monthly mortgage payment: 28% of $6000 = $1680

This rough estimate is a great starting point, but for personalized advice, speak to a mortgage advisor.

But What About My Total Obligation DTI?

Your Total Obligation DTI includes your monthly housing expense plus all your monthly debts.

Example:

• Monthly mortgage: $1680

• Credit card minimum payment: $50

• Car payment: $300

• Student loans: $75

• Total monthly debts: $2105

Total Obligation DTI = $2105 / $6000 = 35%

An ideal Total Obligation DTI is around 36% or lower. A higher ratio doesn’t necessarily disqualify you from buying a home.

Reminder: Do NOT Disqualify Yourself!

Calculating your DTIs is crucial for reviewing your finances before buying a home. However, don’t disqualify yourself before speaking with a professional.

• Mortgage guidelines change, so your advisor will have the latest information.

• Home purchases are not one-size-fits-all; many factors come into play.

• There may be local programs or grants that can help you qualify.

Your mortgage advisor’s job is to help you navigate these calculations and ensure you don’t miss out on opportunities.

If you have concerns or questions about your DTI, make sure to talk to your mortgage advisor to understand all your options.