Knowing your debt-to-income (DTI) ratio is important when refinancing a mortgage because it is a key factor that lenders consider when evaluating your loan application.
Your DTI ratio is calculated by dividing your monthly debt payments by your gross monthly income. A high DTI ratio can indicate that you may have difficulty making mortgage payments, while a low DTI ratio may make you a more attractive candidate for a mortgage refinance.
To calculate your DTI ratio, add up your monthly debt payments, including credit card payments, car payments, student loan payments, and any other outstanding loans. Then divide this total by your gross monthly income, which is your income before taxes and other deductions.
As a general rule, most lenders prefer a DTI ratio below 43%, although some lenders may be willing to consider borrowers with higher ratios. However, the lower your DTI ratio, the better your chances of qualifying for a mortgage refinance with favorable terms.
Before applying for a mortgage refinance, it’s important to calculate your DTI ratio and take steps to improve it if necessary. This may include paying off outstanding debt, increasing your income, or reducing your monthly expenses. A mortgage professional can also help you understand your DTI ratio and provide guidance on how to improve it.