In life, there are some major expenses people struggle to take on, which are fundamentally different from personal indulgences you can’t afford. Almost nobody can afford to pay for a home outright, so they take monthly mortgages that take decades to pay off.
Such a process necessarily involves borrowing money. If you do it correctly, the money homeowners pay to borrow such large sums get offset years later when their investment is worth more when it’s time to sell.
In the meantime, every homeowner must determine the right balance between how much debt to take on based on their personal finances, lifestyle goal, and more. Let’s take a closer at your mortgage refinancing options and learn more about the ideal debt-to-income ratio.
What is Income-to-Debt Ratio?
Debt-to-income ratio (DTI) refers to the percentage of your income used to pay debts. Lender us it to determine borrowing risk. A low DTI demonstrates a healthy balance between money coming in and money paying off debts.
For example, if your DTI is 20%, that means 20% of all the money you make each month needs to pay down debt. If your DTI is 50%, half of your monthly gross income goes toward debt payments.
A lender is more likely to award a loan to the first person because there’s much less risk of non-payment. Banks and other financial institutions like to see low DTIs before lending money. Overextended people may struggle to pay back the loan on time or at all.
What Is Healthy DTI?
Everybody has their own risk tolerance and financial situation. The right DTI for you may be hard to peg down precisely for these reasons. However, for lenders, 43% is generally the highest DTI ratio a borrower can have while qualifying for a mortgage.
As a ballpark figure, ideally, lenders like a DTI below 36%, with 28% of that going towards rent or mortgage payments. There are different ways to improve your DTI, from career changes that increase income, spending reductions to lower your debts or enjoying the benefits of debt consolidation loans that can stabilize your finances.
Speak to a mortgage broker at Burke Financial about the right option for you. We listen carefully to our client’s needs and wants and go the extra mile to ensure you get your finances on a healthy footing. Homeowners have more options available to them than they may realize, so speak to Burke Financial today to learn what’s best for you.
How to Calculate Your DTI
Before speaking to a mortgage broker, you may want to get a general picture of your finances’ health by doing a few calculations at home. To determine your DTI, compare your monthly debt payments to your monthly gross income, which is the amount of money you make before taxes and other deductions.
Whatever the percentage of your gross monthly income that goes towards paying monthly debts, that’s your DTI.
DTI Isn’t Everything
When you apply for a loan or mortgage, the lender looks at more than just your DTI ratio. The borrower’s credit history and credit score are also big, as these are indicators of a person’s ability to repay debts.
Factors that affect credit scores include things like late payments, delinquencies, the number of active and open credit accounts, balances on credit cards compared to their limits, and more. As far as the DTI ratio goes, it doesn’t distinguish between different types of debt or how expensive that debt is.
For example, your credit card debt has considerably higher interest rates than student loans, but they’re all bundled together as far as DTI is concerned. It would be wise to transfer your debts from high-interest rate cards to low-interest ones to reduce your monthly payments and DTI ratio. However, the total debt owed would remain unchanged.
Money lenders use comprehensive and holistic measurements to assess risk and decide who to lend to. Burke Financial has long and deep relationships with various second mortgage lenders, so don’t feel like you’re out of options if the bank has denied you a loan.
We proudly and regularly work with homeowners of all levels of income, credit, and debt. Whatever your DTI happens to be, we can find a way to optimize it and get your finances in a healthy place.
How Burke Financial Can Help
When you visit Burke Financial, you’ll get the help of a committed and award-winning team of experienced experts. Burke Financial is the Toronto mortgage broker that does what it takes to improve your financial health.
From home equity loans, home equity lines of credit, second mortgages, and more, we’ll listen carefully to your needs and find the right solution for you. With Canadian interest rates on the rise, your mortgage payments may be higher today than when you signed up.
Sometimes homeowners need access to cash for things like a renovation or emergency home repair. Tapping into your home’s equity is a common way for people to help make ends meet. You worked hard to make those mortgage payments for years!
Debt consolidation can be a simple way to save over a thousand dollars each month, but you need to take the first step and talk to an expert planner. Being in debt can feel debilitating when it feels like you’ll never get back above water. If you take stock of all your options and make a plan now, you’ll be in much better shape — money takes time to work its magic. A little bit here and there each month can add up quickly, but only if you talk to an expert mortgage broker today.
Daily expenditures are becoming more expensive quickly these days. Life also has a way of throwing curveballs at people quickly, and sometimes these can be expensive. Whether you need to improve your finances by lowering your DTI ratio or simply juggle a few things and pivot your finances, speak to Burke Financial today to get started.