What is a Debt-to-Income Ratio?
Your debt-to-income ratio (DTI) is a numerical representation indicating how responsible you are with your finances and is used to determine the amount of risk you pose as a potential borrower.
This means that lenders will be able to assess your debt load, income and history of debt repayment by analyzing your DTI.
If you have a poor DTI, there are ways to address this which we’ll cover later in the blog.
How is Your DTI Calculated?
Your DTI can be calculated using two different formulas:
1) Gross Debt Service Ratio (GDS)
2) Total Debt Service Ratio (TDS)
The GDS formula is used to assess how much your housing payments cost in comparison to your gross income – these payments include your mortgage payments, municipal taxes, maintenance fees, heating costs, etc.
Once all of your housing payments are added up, it’s divided by your gross monthly income.
There are two different categories of qualifying thresholds for your mortgage payments: the A space and B space.
If your GDS is 39% or below, you qualify for A space lenders and if it’s above 39%, you qualify for B space lenders (the cap for B space depends on the lender).
To calculate your TDS, we first need to add together your P.I.T.H expenses (Mortgage Principal, Interest, Property Taxes and Heating).
Then we add any additional monthly fees (for example: car loans or student debt) to your P.I.T.H total and divide it by your gross income – this calculation represents your TDS.
To qualify for an A-space lender, your TDS cannot exceed 44%.
B-space lenders may allow you to go higher than 44% because they have different investors behind the scenes that could be willing to take on riskier clients.
Why Does Your DTI matter?
The higher your DTI, the less chance you have of being qualified for a mortgage loan.
If you have a lower DTI, it means that you’re allocating less of your disposable income, or gross income, to your monthly debt obligations and are therefore less of a risk in the eyes of a lender.
How Can I Improve my DTI?
To improve your DTI, you need to focus on paying off your debt/s immediately.
The first step to improving your debt is to take a snapshot of your financial situation and understand the areas that need addressing.
This is where I come in. We can go through your finances in depth together to come up with a game plan that will put you on the right path to achieve your goal of purchasing a home.
One of the biggest benefits of working with a mortgage broker is that you get tailored service specific to your financial needs.
If you have any questions regarding your DTI, or anything relating to mortgages, feel free to give me a call and I’ll gladly help wherever I can.