How important is debt-to-income when qualifying for a mortgage?

On Behalf of | Apr 29, 2021 | Real Estate Transactions | 0 comments

If you want to get a mortgage, you will have to meet various requirements set by your lender, which include having an acceptable debt-to-income ratio.

According to the Consumer Financial Protection Bureau, debt-to-income ratio is the calculation of your monthly debts and gross monthly income. The formula is debts divided by income.

The ideal ratio

While lenders have varying requirements, the general debt-to-income ratio they all like to see is 43% or lower. Lenders look at this as the point at which you can still afford to make a mortgage payment without having difficulties.

The 43% comes from research showing that this is the tipping point between borrowers who pay their payments and those who do not.

The importance

The reason lenders rely so heavily on this ratio is because they have to ensure you will be able to afford to pay your mortgage.

Lenders only want to give money to people who will pay it back. They do not like having to foreclose on homes. If you do not meet the debt-to-income ratio requirements, it tells them that you are having financial struggles that make you at high risk for default and therefore are not a good candidate for a loan.

The exceptions

Some lenders will offer you a loan at a higher ratio. However, you may have to shop around to find one. In addition, you can expect to have less desirable terms, fees and interest if you cannot meet the 43% ratio point.

The debt-to-income ratio is also a good way for you to assess your financial health prior to starting the home buying process.