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Debt-to-income ratio | HomeStreet Bank

What does debt-to-income ratio mean?

Explaining what DTI means in the mortgage process.

Your debt-to-income ratio, or DTI, is an important factor in a typical loan approval process. The ratio compares what you owe to what you make, giving a lender a picture of your ability to fulfill your financial obligations. Most home loan programs set a maximum allowable debt-to-income ratio. A higher ratio may indicate less ability to pay and a higher risk of defaulting on the loan.

Your credit report contains information about your debts and your required monthly payments. Other monthly obligations that don’t appear on a credit report, such as child support or alimony, are also included when calculating your DTI. Your paystub, tax return, or W2 provides your gross annual income, which is then divided by twelve for a monthly average. The two numbers are then converted to a ratio. For example, $880 in monthly debt and $4,400 in monthly income gives you a DTI of 20%. In this situation, if you are looking at a loan program that requires a DTI of less than 40% with the expected monthly mortgage payment included, you could spend up to 20% of your monthly gross income on a mortgage payment and fit within the acceptable criteria of that particular program.

Items that are not included in a DTI ratio generally include monthly bills for services like internet, cable, phone, car insurance, and rental payments you won’t be making once you purchase a home. These are considered items that you could forgo if necessary.

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