Let’s start off with, what even IS a debt to income ratio? Also known as DTI, your debt to income ratio is calculated when you go to qualify for a mortgage. Basically, DTI is adding up your total monthly debts (car payment, credit card payments, monthly mortgage/rent, student loan payments etc.) & dividing it by your monthly gross income. This step is equally as important as your credit score & job stability!
What is a good debt to income ratio?
Most lenders typically will tell you somewhere are 36% is the sweet spot. Although in some cases there are exceptions allowing for a higher DTI. Keep in mind, your DTI ratio does NOT factor in your grocery expenses, child care, utilities, health care and many other added monthly expenses. This is important to keep in mind because you do not want to get in over your head. Budget out ALL your monthly expenses then decide what kind of monthly payment will be comfortable for you.
If you’re considering homeownership & want to get your DTI ratio down, do these 4 things:
- Track your spending & create a budget. Include ALL your expenses & allocate your remaining funds to paying off your debt.
- Make a plan to pay down debt. There are two common ways people go about this. The first way is paying off the credit card with the smallest balance & working their way up. The second (what I would do) is organize your cards by highest interest rate to lowest & pay off the highest rate card first.
- Make your debt more affordable. First, call all your cards and try to negotiate a lower rate. Second, if you can do a balance transfer to another card with a lower rate or promo rate, do it. Lastly, consolidate all your cards to a personal loan. A lot of times your bank will give you a better rate than most credit card companies.
- Avoid taking on more debt. Enough said. Just don’t do it.