Your debt-to-income ratio (DTI) is an important factor that lenders consider when you apply to refinance a home loan. Your DTI is a measure of how much of your monthly income goes toward paying debts, including your mortgage, credit cards, car loans, and other expenses. A high DTI can make it more difficult to qualify for a refinance loan or result in higher interest rates.
To calculate your DTI, add up all your monthly debt payments and divide by your gross monthly income. For example, if your monthly debt payments total $2,000 and your gross monthly income is $6,000, your DTI would be 33% (2,000 / 6,000).
When you apply to refinance your home loan, your lender will typically require documentation of your income and debts, including pay stubs, tax returns, and bank statements. They will use this information to calculate your DTI and determine your eligibility for a refinance loan.
To improve your chances of qualifying for a refinance loan with a favorable interest rate, it’s a good idea to work on reducing your debt and increasing your income before applying. This can include paying off credit card balances, consolidating debt, and negotiating a raise or finding additional sources of income.