When you apply for a mortgage, one of the most important factors that lenders will consider is your debt-to-income ratio.
This ratio compares the amount of money you earn each month (before tax) to the amount of money you pay on all of your debts, including credit cards, car loans and student loans.
The higher your debt-to-income ratio, the less likely it is that you will be approved for a mortgage. Lenders prefer to see a DTI ratio of no more than 50% for a conventional mortgage. Read more about how it works here.
For example:
If your gross monthly income is £3,000 and you spend £750 per month paying off debts, your debt-to-income ratio is 750/3,000, or 25%.
To calculate your own debt-to-income ratio, you need to know:
- Your gross monthly income (income before tax)
- Your regular monthly debt payments
The DTI forms part of the processing, or underwriting, of your mortgage application. Lenders will also be looking at your income and expenditure and a stress test may be used to see how you would cope if interest rates went up.
