In part one of this two-part blog series, we went over some of the basics associated with debt-to-income ratio during a mortgage application. Abbreviated DTI, this ratio helps lenders understand how much of your monthly income is going toward paying down debts, a big factor they use to assess your overall creditworthiness and the kinds of loans to approve you for.
At Altius Mortgage and our partners at Mortgage Ogden, we’ll happily detail our DTI investigation process for any of our clients, from first-time homebuyers to experienced real estate flippers and everyone in between. Today’s part two will dig into how mortgage debts compare to other types, which debt types are “good” or “bad” for DTI areas, and how you can lower your DTI ratio leading up to a mortgage application.
We went over some various loan types in part one – how do mortgages compare to these when it comes to debt and how it’s considered?
Broadly speaking, mortgages are secured loans, with the home and property being purchased serving as the collateral used. Mortgages tend to come with lower interest rates over a long period of time. Lenders use DTI ratio not only to determine whether you qualify for a given mortgage, but also to define the limit on how much you can borrow given your finances.
Good Vs. Bad Debts for DTI
As we noted in part one, while there are general ranges lenders want to see a DTI ratio come in under (40% or 36% in most cases), there may be some wiggle room here depending on whether your debt is primarily of the “good” or “bad” variety. Lenders consider good debt to be the kind that helps increase net worth or generate income, while bad debt is used to purchase depreciating assets of some kind.
Here are some examples of each:
- Good debts: Areas like mortgages (provide a living space, plus real estate tends to appreciate in value over time), student loans (provide an education that increases earning potential) or small business loans (help to start and grow a business) are considered good debts, and lenders may be more forgiving on them.
- Bad debts: Personal loans (small loans with huge fees and interest rates), car loans (cars depreciate over time) and credit card loans (usually have very high interest rates and fast repayment schedules) are generally considered bad debt.
Tips for Lowering DTI Ratio
If you’re thinking of applying for a mortgage in the near future and are worried your DTI ratio is too high, here are some basic tips for lowering it:
- Avoid any big purchases on credit for the time being
- Do everything you can to repay current debts as much as possible
- Do not take on new debt accounts or debt types
For more on debt-to-income ratio and its role in mortgage applications, or to learn about any of our home loan products, speak to the staff at Altius Mortgage today.