Your debt-to-income ratio (often known as DTI) is a term you might hear a lot on your journey to homeownership. To put it simply, this percentage represents the portion of your gross monthly income (before taxes) that goes toward paying off debts. That can mean credit cards, student loans, rent, or personal loans. If 50% of your monthly income goes toward paying those off, then your debt-to-income ratio is 50%.
What’s your debt-to-income ratio used for?
Your DTI ratio can help you decide how much you’re comfortable spending on your home each month, whether it’s rent or mortgage payments. It helps color the picture of your financial health. Are you taking on more debt than you can handle? Do you have room in your budget for a new financial commitment?
When it comes to getting a mortgage, lenders perceive your debt-to-income ratio as a strong indicator of whether you can pay back your loan in a steady, timely manner. The lower it is, the better, because it means there’s plenty of room in your monthly budget. Many lenders prefer to see a DTI below 36%, but Landis approves clients with up to 45%.
How to calculate your debt-to-income ratio
Step one
Start by adding up your monthly payments. That doesn’t include expenses like groceries, gas, and bills. It means things like:
- Monthly rent
- Child support or alimony payments
- Loan payments, like student debt, auto financing, or personal loans
- Your required minimum credit card payment
- Any recurring mandated payments, like back taxes or HOA fees
Step two
Take that monthly payment total and divide it by your gross monthly income, which is your monthly income before taxes are applied. This can include child support or government benefits in addition to employment earnings.
Step three
The answer you’ll get is a percentage. That’s your debt-to-income ratio.
How to lower your debt-to-income ratio
If your DTI ratio isn’t where you want it to be, don’t worry. It’s possible to lower it using these methods.
Pay off interest
It may be easier said than done, but the simplest way to lower your DTI is to pay off debt. It’s good to start with the debt that carries the highest interest rate, so that more interest doesn’t accumulate while you chip away at it.
Shrink your monthly payment
Reach out to your creditors to see if you’re able to lower the rate on your auto loan or credit cards and reduce your monthly payment. Refinancing also allows you to renegotiate the terms of your loan, spreading the balance out over a longer term with smaller monthly payments.
Apply with someone else
Adding a co-applicant to your mortgage or Landis application can drop your debt-to-income ratio because it incorporates their income into the calculation. Choose your co-applicant wisely though, because their debt will also be added to the mix. Keep in mind that Landis requires that your co-applicant share the home with you.
If you’re ready to own a home but your debt-to-income ratio isn’t where you want it to be, Landis can help. Landis will buy your dream home for you, then set you up with a coach to help you lower your debt-to-income ratio, raise your credit score, and get a mortgage to buy it back. Get prequalified to see if the Landis program is right for you.