DTI is a common term on a home loan and it is actually a very important part of you getting approved for that home loan. We'll help you better understand what this is and what it means so you can be better prepared.
What is DTI?
DTI stands for debt-to-income ratio. This is a mathematical equation that was designed to help banks understand the risk and your ability to repay the money that they are loaning you. Because banks, after all, absorb the loss if you default on the loan, and therefore have be scrupulous on who they approve for certain credit lines or loans.
How is it Factored?
The debt-to-income ratio can be factored in a number of ways. But the most common method is simple. Take what you are earning per month before taxes; your gross income. Next add up all your monthly debt payments. What percent of your gross monthly income does this add up to be? That number is your debt-to-income ratio. If you are wondering what your DTI is, Bankrate offers a free and handy calculator that can help you determine it in just a few minutes.
Why Does it Matter?
The debt-to-income ratio matters because it lets banks figure out what you can afford to pay per month in a safe bracket. This number is then used to determine how much money they are willing to loan you and what interest rate they will charge. It's in place for a good reason: to help homeowners only buy a house they can afford and to protect the bank's bottom line.
Exceptions
The only type of home loan that this wouldn't apply to would be an unconventional and nonrecourse home loan, such as a reverse mortgage. That's because these loans are not based upon your income or your credit rating, but rather your home's value and the existing equity.
Aside from this type of special circumstance home loan, however, your DTI matters greatly. It can mean the difference between banks saying yes or no, and can also affect what interest you are assigned based upon wholly risk.