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What Is the Debt-To-Income Ratio?

When you’re trying to buy a house, research is very important. From researching your potential new neighborhood to knowing how much house you can afford, to understanding what your mortgage options are, there is no shortage of knowledge to acquire. At GVC Mortgage, we make it a priority to form relationships with our clients so we can help them understand the home-buying process and find the right mortgage for their specific circumstances. Today, we’re discussing a common mortgage term, “debt-to-income ratio”, so you can be one step closer to understanding how a mortgage works.

Debt-to-Income Ratio

What Is Debt-To-Income?

When calculating how much home loan you can afford, your mortgage officer will look at a number of factors regarding your finances. They’ll want to see your bank account information, your proof of income, and they will calculate your debt-to-income ratio. This is a percentage that is calculated by dividing your monthly debt by your monthly income. This number represents the percentage of your monthly income that is obligated toward debt.

Why Does Debt-To-Income Matter?

Lenders use your debt-to-income ratio to determine whether you have the ability to repay your loan. Different lenders have different guidelines to follow, but traditionally, they will want to see your ratio less than or equal to 36%. While it is possible that you would qualify for a loan if your percentage is above this number, the lower your debt-to-income ratio, the better.

What Does Debt-To-Income Mean to Me?

Finally, while this number does play a significant part in determining your home loan amount, ultimately, you are the only one who knows what you can afford. Your debt-to-income ratio does not take into account the income you use for utilities, food, clothing, and other monthly expenses. So, just because you get approved for a certain amount doesn’t mean you should spend it. Your lender decides what you can borrow, but only you can decide what you can live with.

At GVC Mortgage, we aim to make financial matters as simple as possible. Check out our resources page for more information or contact our Carmel, Indiana office today at (317) 564-4906 with any questions.

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