Your DTI When Refinancing…
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.
- Try to consolidate your current Debt into lower monthly payments
- If you’ll be living with someone else in your new home (who currently has a steady stream of income) adding them to the mortgage can help your DTI as long as they’re not carrying too much debt.
- Consider a non-occupying co-borrower who has a low DTI.
So how can Refinancing lower your DTI??
- Consolidate Your Debt:
If you’re looking to Refinance, consolidating your Debt with a Refinance loan (rolling your Debt into your Mortgage, so you’ll only have to make one payment a month, and at a better rate) can be a solution! You can save money monthly while paying-off your Debts.
- Refinance With Cash Out Option:
Another option is to refinance with a cash-out option. You can take cash out of your equity and use it for home improvements and the amount you’ve taken out of your equity will just be added to your existing Mortgage amount.
- Lower Your Interest Rate:
Lowering your monthly payments with a better mortgage rate can help put more money back in your pocket and, in turn, you can use the leftover cash to pay down your other outstanding Debts.
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