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DTI ratio, or debt-to-income ratio, is the amount of debt you have to pay off each month in relation to your gross monthly income. This number is represented as a percentage. For example, if 50% of your income goes to debt payments, you need to reduce debt before taking on the financial responsibility of a home.

Up Next: What Is Gross Income?

Your DTI ratio is used by lenders to determine your eligibility for a home loan. The lower your DTI, the more likely you are to be approved. If your DTI ratio is on the higher side, here are four tips to improve it:

Have A Realistic Budget

DTI ratioKeeping a realistic budget will help you be responsible with money and prevent monthly costs from eating up your income. Take into account not only your debt payments but payments such as:

  • Utilities
  • Car insurance
  • Homeowner expenses
  • Groceries

Regularly Calculate Your DTI Ratio

Regularly calculating your DTI ratio will keep you on track and show you how you are progressing. It will also keep you motivated to keep your debt manageable when you see it fall.

When calculating DTI, do not include monthly living expenses such as utilities, car insurance, and groceries. Use the following formula:

Monthly debt payment / Gross monthly income = Debt-to-income ratio

Pay Off Debt Responsibly

Responsibly paying off debt means paying the minimum amount you owe each month. When possible, put more money towards monthly debt payments to help pay it off faster. Remember only to do so when you can afford it. You do not want to use money that you need for living expenses like groceries and utility bills.

If possible, consolidate your debts (especially if you have multiple student loans), so you only have one monthly payment.

Don’t Take On More Debt Before A Home Purchase

If you are looking to purchase a home, avoid taking out more debt. This means no large purchases like a car, boat, or even financing furniture. Sine DTI helps lenders determine your eligibility for a home loan, and if you take out more debt, lenders will be wary of lending to you.

While it is possible to get a home loan that works for you and your DTI ratio, ideally, you should lower it and save up before purchasing a home. That way, you will be ready to take on the financial responsibility.

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