This ratio can make or break your loan approval, as it is one of the largest qualification criteria used for home loan applicants. When you apply for a mortgage, one of the first things the lender will do is check your debt-to-income ratio, or DTI.
As the name implies, this is a comparison between the amount of money you pay toward your debts each month, and the amount of money you earn.
This is similar to the ratio discussed earlier, the credit-utilization ratio. But this one compares your overall debt to your monthly income. Mortgage lenders use the DTI to assess your financial stability and borrowing capacity. If you have a lot of debt already, relative to your income, you’ll probably have a hard time getting approved for a loan. This is all based on statistics. Lenders know that borrowers with higher debt ratios have a higher probability of delinquencies (missed payments) and defaults (ceased payments) down the road. As a result, they typically refrain from lending to such borrowers in order to reduce risk.
This is another area where credit card debt can affect your mortgage approval. Lenders are usually reluctant to offer financing to borrowers with DTI ratios above a certain level. Fifty percent is a common limit. This means that if your total debt load (including your future mortgage payment) uses up more than 50% of your gross monthly income, you could have trouble qualifying for a mortgage. To follow new lending rules, some lenders even set the bar at 43% debt-to-ratio.
This is another reason why you should consider reducing your credit card debt before buying a home. If you’re carrying too much, it can drag down your credit score as well as your DTI ratio. And both of these things will make it harder to get approved for a mortgage.