Your debt-to-income ratio is the percentage of your gross monthly income that goes toward debt payments. Lenders use DTI to assess whether you can afford a new mortgage or refinance.
To calculate your DTI, add up all your monthly debt payments (mortgage, car loans, student loans, credit card minimums, and any other recurring obligations) and divide by your gross monthly income. Multiply by 100 to get the percentage.
Most lenders prefer a DTI of 43% or lower for conventional loans, though some programs allow up to 50%. There are two types: front-end DTI (housing costs only as a percentage of income) and back-end DTI (all debts as a percentage of income). Lenders typically focus on back-end DTI for the full picture.
If your DTI is too high, you may not qualify for a refinance even if your credit score is excellent. Strategies to lower your DTI include paying off smaller debts before applying, increasing your income, or choosing a longer loan term to reduce the monthly payment amount.
A credit score is a three-digit number (typically 300 to 850) that represents your creditworthiness. Lenders use it to determine your mortgage eligibility and the interest rate you qualify for.
Conventional LoanA conventional loan is a mortgage that is not backed by a government agency like the FHA, VA, or USDA. Conventional loans typically require higher credit scores and larger down payments but offer competitive rates.
RefinanceRefinancing means replacing your current mortgage with a new loan, typically to get a lower interest rate, change the loan term, or access your home equity through a cash-out refinance.
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