Lenders look at more than your credit score and downpayment when deciding whether to approve you for your Lake Havasu City home. They also need to calculate your debt-to-income (DTI) ratio. While some lenders have allowed a DTI as high as 52%, the general rule of thumb is to keep the DTI at 45% or less. Anything higher than 45% leaves you in danger of losing the deal. Do, how do you calculate your debt-to-income ratio?
Your income should be pretty simple to determine. Banks look at the last two years of gross income. So, use your last two years’ tax returns, W-2s or paycheck stubs to find out what your monthly income from you (and your spouse, if appropriate) has been. If self-employed, this will be your Adjusted Gross Income (Line 37 on your return). Bonuses can be added in if you can provide proof of receiving them over the last two years consistently.
Determining your debt may be a little harder. Included in the 45% maximum DTI is what your new Lake Havasu City home, taxes, insurance, HOA, etc, will be. You should already have a copy of your credit report so you could fix any mistakes on it before you finance. The credit report can also help you in finding out your total debt. Add up all the minimum monthly payments for each credit card, car loan, student loan and other debts found on your credit report. Banks may decide to discount your monthly car payment if the remaining balance is 10 payments or less. Student loans may also be taken out of the equation if they are currently in deferment for three years.
After you have calculated your total debt and your total income, it’s a simple math problem. Income divided by debt equals your debt-to-income ratio. For example, if your total monthly income for your household is $5000 and you have a total monthly debt (including the new Lake Havasu home payment, insurance, etc.) of $2068, your total DTI would be 41%. Use Bankrate.com’s Debt-to-Income Ratio Calculator to help determine what your DTI ratio. If your DTI is too high, you may need to consider looking for a Lake Havasu City home with a lower price tag.
Calculating your debt-to-income ratio before you finance a Lake Havasu home is a helpful step in determining whether that property you are interested in makes financial sense for you. Being armed with as much information as possible will help make your real estate transaction go much more smoothly while reducing some of the stress of the “unknown”. Please contact me if you have any questions.
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