When you apply for a home loan, the lender will thoroughly analyze your financial situation before approving the loan, and one of the factors that lenders consider is an applicant's debt-to-income (DTI) ratio. Before you apply for a loan, you should understand what this is, why it matters, and how to improve yours.

What is a DTI ratio?

Your DTI ratio is calculated by dividing all of your normal monthly expenses by your gross monthly income. For example, if you earn $5,000 a month and have monthly expenses of $2000, your DTI would be 40% ($2,000 divided by $5,000). Lenders always calculate an applicant's DTI ratio when reviewing loan applications, and they tend to want to see a DTI ratio that is 43% or lower.

Why does it matter?

This ratio is useful to lenders because it helps them tell whether a person will be able to afford a mortgage loan based on the income the person currently has. When a person's DTI ratio is too high, it typically means the person is overextended, and this person may experience problems paying his or her bills each month.

How can you improve yours?

There are two main ways to improve your DTI ratio, which are increasing your monthly income and decreasing your monthly expenses. If you want to get a good mortgage loan but have a high DTI, taking a few months to make some changes could be beneficial for your ability to get a loan and your ability to get a good loan. Here are some tips that may help you improve your DTI ratio:

  • Get a second job – The best way to quickly increase your monthly income is to get another job. If you add a part-time income to your current full-time income, it may help you decrease your DTI ratio. With the above example, you could change your DTI ratio from 40% to 36% simply by increasing your monthly income from $5,000 to $5,500.
  • Pay off debt – The other option is to find a way to pay off the debt you have so your monthly expenses are lower. If you have money in the bank, you could use this to pay off your debt, or you could use the income from your second job to pay it off.

Before you apply for a mortgage loan, it's important to understand the factors the lender will consider when you apply for a loan. To learn more, contact a mortgage lender, like one from Premium Mortgage Corp, in your city.