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How your DTI affects your chances for mortgage approval


June is Homeownership Month and Tropical Financial Credit Union wants your dream of owning a new or next home to become a reality. When you apply with us or any lender, your approval may depend on your debt-to-income (DTI) ratio. Here’s our guide to how the percentage is calculated and what you can do to improve it. The lower the ratio, the more likely you are to qualify or pre-qualify for the home of your dreams.

First, know that Fannie Mae, Freddie Mac, and the Federal Housing Authority set the criteria for the loans they buy from Tropical Financial Credit Union and other lenders. In the simplest terms, the ratio is all your monthly payments divided by your monthly income. Fannie Mae, for example, identifies 10 obligations that factor into the debt side. In addition to the mortgage and attending property taxes and insurance, they include installment loans and credit card payments, divorce-related responsibilities such as child support, and other real estate loans such as a second home or investment property.

That total is put against the total “stable monthly income” of all borrowers on the mortgage application. Your earnings from an occasional side job will not count toward the total. Divide one into another for the ratio. Fannie Mae’s maximum is 36%. Want to go higher? You’ll have to enter something called the “Eligibility Matrix.”

The FHA uses two numbers: 31% for your total home payments and 43% for that plus all other long-term debt.

You can do your own math with Tropical's Mortgage calculator. If your ratio is too high, fear not. You can qualify for a more modest home or take steps to improve the ratio. Here’s how to tackle the latter problem:

Eliminate high-interest credit balances. If you have good credit, your highest rate borrowing balances are on credit cards. Pay those down or refinance them with a personal loan. You could shave 10-plus percentage points off the rate and lower the monthly payment with an unsecured personal loan from Tropical Financial. Depending on your car loan rate, you may find it pays to refinance that, too.

Reduce expenses. A little spending pain today can pay great dividends tomorrow when you have eliminated a debt or lowered the balance on a revolving line of credit. Take a budget vacation instead of an amenities-loaded one. Eat in more often. And limit your online shopping.

Take on no new debts. Put away the credit cards. Make your car last another year or two rather than buy a new one with a higher monthly payment. Put off purchasing a giant-screen TV until you need to replace your old TV.

Stick to a budget. Find out where the money goes each month. Hold yourself accountable for not exceeding the spending limit, even if it means going without at the end of each month.

Up your income. Instant cash from a one-off side job can be applied to slashing or eliminating a financial obligation. Your debt-to-income ratio will immediately improve as the payment drops or even disappears.

Want to know how much home you qualify to buy? Meet with a mortgage officer at Tropical Financial.

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