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How important is the debt-to-income ratio?

On Behalf of | Oct 11, 2018 | Real Estate Transactions

If you struggle with debt, you may wonder how it will affect your ability to buy a home in Pennsylvania. When it comes to how lenders decide if they will help you or not, it often comes down to one thing. This is your debt-to-income ratio. According to the Consumer Financial Protection Bureau, a debt-to-income ratio is the result of dividing your monthly debt by your monthly income.

You use your gross income to figure the ratio. For example, if you earn $1000 after taxes each month and your debt is $100, then your debt-to-income ratio is 10 percent. This means you spend 10 percent of your monthly income on debt. You have 90 percent left over for other expenses, which looks good to a lender. If your debt is $600 a month, though, your debt-to-income ratio would be 60 percent, which is not as attractive to lenders.

The standard ratio is often 43 percent. Lenders do not want you to pay out more than 43 percent of your income each month on debt. If your ratio is too high, then many lenders will not approve you for a mortgage. Lenders want to know that you have the money each month to pay your mortgage payments. Your debt-to-income ratio tells them if you may face struggles.

While 43 percent is a common standard, it is not a rule. Some lenders may approve you even if it is higher. However, the lender will always want proof that you can repay the mortgage despite having a high amount of debt. This information is for educational use only. It is not legal advice.