You’ve made a huge decision: You’re going to purchase a house. But while you’ve been diligently setting money aside for the down payment, you still don’t know the answer to one of the most important home-buying questions: How much can you afford to put toward a monthly house payment?
When taking this exciting step, it’s important to feel confident that the monthly payment you commit yourself to is manageable. If it’s not, you could find yourself stressed to meet other financial obligations or worse yet, unable to pay your mortgage on time.
The best way to be certain you’re making the smartest decision for your finances? Have an understanding of your debt-to-income ratio.
What’s a debt-to-income ratio?
A debt-to-income ratio, or DTI, is the industry standard for establishing how much house you can afford. It’s calculated by taking the total amount of your new mortgage payment plus your existing monthly debt payments (think: car payment, student loan, outstanding credit card balances) divided by your gross monthly income. The number you get tells you the percentage of your monthly income that goes towards paying down debt.
Your DTI doesn’t just tell you how much house you can afford. Lenders also take it into consideration when measuring your ability to pay back a mortgage.
What’s considered a good DTI?
If your DTI is under 36 percent, you’re sitting pretty. In other words, if you spend less than 36 percent of your monthly income on debt payments (including your new mortgage payment), your financial health is sound and you haven’t overleveraged yourself.
While 36 percent is a safe threshold, the lower your DTI, the better.
How do I calculate my DTI?
A variety of online tools allow you to enter your income and current monthly payments. In return, you’ll receive an estimate of the maximum mortgage that you could qualify for. Our Home Affordability Calculator is a quick, easy, and free way to assess your home-buying budget.
Once you know your DTI, you’ll be armed with the knowledge necessary to make the next move — finding the home that fulfills your dreams and meets your budget.