Debt To Income Ratio - What is DIT

Can you afford to buy a house? You’re debt to income ratio might be a good indicator to tell. I’m Austin Robertson a local real estate broker here in the greater Tacoma Seattle area. Let’s take a look at what DTI is really all about. 

Alright let’s jump right in. If you get any value from this video please like and subscribe. 

Debt to income ratio is in the simplest way a formula that shows a lender how your debts stack up against your income. It’s not a set standard each lender can determine their own levels of risk and use the debit to income equation in partnership with your credit to determine how likely they believe you are to repay a loan. 

So does my debit to income affect my credit score. Well, no, again they are used in conjunction with one another. Creditors do not often know or judge your income when it comes to your credit score. Instead they look at your credit utilization. Credit reporting agencies know your available credit limits, both on individual cards and in total, and most experts advise keeping the balances on your cards no higher than 30% of your credit limit. Obviously, the Lower is better.

When it comes to Debt to income anything under thirty five percent is preferred. When your DTI is that low you really shouldn’t have any issues not only taking on new lines of credit but also managing the ones that you have. 

If you debt to income hits around forty three percent this is when the situation gets a lot more tight and at fifty percent paying down debt will be really difficult and this when we start seeing people turn to options like Bankruptcy. 

Alright, so what is included in the your DTI and how do we calculate it? Remember this is your income so any sourceable income you make. Like wages from your job or self employed income you can prove. On the Debt side the items included are your mortgage payment or rent payment, any car loans or lease payments you make on a vehicle, your student loans and their payments, credit cards often figured by monthly minimum payments, payments on any personal loans you have, child support and any other regular debts you might have. Expenses like gas, your utilities, or cell phone bill are not included in your front end DTI.

Let’s look at an example. Remember our goal for the scenario is to be at or below the 36% we are going to add up all our monthly debts and divide by our income to get our DTI

So let’s say to start off you have a mortgage of three thousand even, you’re paying 450 on a car and the second one is already paid off, your Student loan payments are 180 dollars a month, and you have a minimum credit card payment of 150 dollars a month that brings our total monthly debt to three thousand seven hundred and eighty dollars. Now we make an average of twenty thousand dollars a month. We are going to take our three thousand seven hundred eight dollars and divide that by our sourceable income of twenty thousand dollars that brings our debt to icome to 18.9% which is pretty fantastic.

If you want to see where you are at you can replicate this with your own numbers.  Lenders will also do their own math, it’s not required that you perform this function. 

I hope this brought you some clarity on the discussion of debt to income and how does this effect me buying a home. If you need help buying or selling a home in Washington please reach out to me, my contact is in the description below. If you are in a different state I have a vast network of incredible real estate brokers I can connect you with. Just comment below where or send me an email and I’ll get you in contact with an industry expert in your area. Until next time I’m Austin Robertson.