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November 2019
Your DTI When Refinancing…
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So you’re about to Refinance your home- nice! There are many things to consider before moving forward. Most Borrowers tend to lose sleep over their credit scores, job history, amount of income, etc.. However, one of the most overlooked variables in determining mortgage eligibility is the Borrower’s DTI (Debt-to-Income ratio). As a matter-of-fact, DTI’s are the #1 reason Mortgage applications get rejected. The DTI is determined using the following equation: (Your monthly debt including your future mortgage payments) ÷ monthly income (money you earn before taxes) = Your DTI *The lower your DTI, the better chances you have of obtaining lower rates and getting your mortgage approved. What Does Your DTI Tell Lenders? A low debt-to-income (DTI) ratio demonstrates a good balance between debt and income. In other words, if your DTI ratio is a lower figure; For example, let’s say your DTI is 15%, which means that 15% of your monthly gross income goes to debt payments each month. On the other hand, a higher DTI number can signal that an individual has too much debt for the amount of income earned each month. Typically, borrowers with low debt-to-income ratios are likely to manage their monthly debt payments more effectively and have better chances of obtaining a better mortgage. As a result, banks and financial credit providers want to see low DTI ratios before issuing loans to a potential borrower. The preference for low DTI ratios makes sense since lenders want to be sure a borrower isn’t fiscally overwhelmed by having too many debt payments relative to their income. As a general guideline, 43% is the highest DTI ratio a borrower can have and still get qualified for a mortgage. Ideally, mortgage lenders prefer a debt-to-income ratio lower than 36%, with no more than 28% of that debt going towards servicing a mortgage. The maximum DTI ratio varies from lender to lender. However, the lower the debt-to-income ratio, the better the chances that the borrower will be approved, or at least considered, for the credit application. So what are some tips to lower your DTI before your Refinance? Pay-off as much of your credit cards as you can without closing the account. Hold-off on taking out any loans (especially larger amounts) during the Refinancing process.
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