Why Your Debt Matters When Buying Your First Knoxville Home
It’s a common misconception for many first time buyers that your credit score is all that matters when getting approved for a mortgage. While a credit score is very important along with a source for the downpayment, it’s only a piece of the puzzle.
For many Knoxville first time buyers, the concept of debt-to-income ratio, often referred to as DTI, can be a confusing concept, particularly in understanding why lenders use them.
In this post, we’ll look a bit closer at why your debt matters, what DTI is, why it matters to lenders, and how to properly manager yours so you can buy your first Knoxville home.
What Is DTI?
Debt-to-income ratio is a simple way that lenders measure your ability to make payments. It measures how much debt you have compared to your gross monthly income (i.e. income before taxes). To figure out your DTI, you take all your monthly debt divided by your gross income. For example, if you make $4,000 a month and you have $1,575 in total monthly debt, your DTI is 39%.
Why Does DTI Matter To Lenders?
DTI is a good way to show lenders how much of your current income currently goes towards you monthly debt. Things like student loans, car payments and credit card debts are all things than can add up quickly. If you’re so overspent on you current monthly debts, your DTI will show that you may not have enough room for a mortgage based on your current debts.
What Is Considered Good DTI?
Generally speaking, having a DTI of less than 50% is considered good when applying for a mortgage. Anything lower than that is good, too. Anything higher than that could make it hard for you to get approved for a loan. Keep in mind though, the specific numbers of what is allowed for DTI varies on the type of loan, some are a little stricter and some are a little more generous. Be sure to talk with a loan officer to see where you numbers specifically need to fall to get approved for a mortgage.
What Do I Do To Improve My DTI?
Improving your DTI is simple, lower your debt. This can be done by paying down current debt and not taking on any additional debt. By paying down your debts, you’ll allow your income to go further. There is another option, but it can be a little more difficult for some borrowers, you can increase your income. If you have more money to work with, your income can go a little further.
Bottom Line – DTI Matters, Too
Many first time buyers underestimate the important of their debt-to-income ratio. They assume that credit and decent income is all that matters when applying for a loan. Even if your mortgage payment would be the same as what you’re paying in rent, it doesn’t mean that a mortgage lender will approve you for it. You may personally be able to afford it, but if you debt-to-income ratios are not where they need to be, a lender will see you as a risky loan option. When you’re ready to buy a home, keep your debt in check and make it a priority to pay things down.
Are you thinking about buying your first Knoxville home for sale this year? If so, do not hesitate to give Knoxville Home Team a call today. Rick can be reached at 865-696-9002 or via email at Rick@KnoxvilleHomeTeam.com. Kati can be reached at 865-696-1888 or via email at Kati@KnoxvilleHomeTeam.com. We’ve helped countless first time buyers find the perfect home for them and we’d love to help you do the same!