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Your debt-to-income ratio is vital when obtaining mortgage debt

On Behalf of | Jun 17, 2022 | Mortgage Debt

It can be exciting to purchase a home in Michigan. If this is your goal, it’s essential to understand all the elements involved. While considering finances is necessary, analyzing affordability is also critical. You’ll need to examine mortgage rates and your debt-to-income (DTI) ratio.

Factors affecting housing affordability

If you’re going to buy a home, you’ll need to examine the factors affecting housing affordability. These can include the price tag, current real estate market fluctuations, interest rate and lifestyle. If home prices have been escalating steadily for the past year, finding a suitable home can be more challenging. Along with these factors, understanding your DTI ratio is vital. It helps determine the amount of mortgage debt you can afford.

Understanding your debt-to-income ratio

Knowing the mortgage you can afford is essential when purchasing a home. A range between 36% and 43% are acceptable DTI ratios used by the Federal Housing Administration (FHA). Your DTI ratio gauges if you can handle monthly payments. In some cases, lenders will be more rigid or lenient with the number they allow. It includes the following monthly expenses for both housing and other debts:

• Regular debt payments

• Mortgage

• Mortgage insurance

• Homeowners Association fees

• Property tax

• Homeowners insurance

After adding these expenses together, divide them by your monthly gross income to get a figure that should not equal more than 43%. For example, if your gross income is $5000 and you have monthly credit card debt of $500 and $1500 housing expenses, your DTI ratio will be 40%, which is close to the limit. Paying off credit cards can help you afford more housing debt. Increasing your gross monthly income is another way to improve this ratio.

Understanding the DTI ratio’s importance is essential when purchasing a home. Staying below the 43% limit is critical in obtaining a mortgage.