Episode•November 15, 2022•6 min

Tiffany's Take: What is Debt-to-Income Ratio? | Ep. 166

Every Tuesday, Tiffany answers one of your submitted questions. To submit a question for an upcoming episode, visit here: https://www.moneytalkwitht.com/asktiffany. Connect with Tiffany on Social Media Facebook: Money Talk With Tiff Twitter: @moneytalkwitht Instagram: @moneytalkwitht LinkedIn: Tiffany Grant This podcast uses the following third-party services for analysis: Podcorn - https://podcorn.com/privacy OP3 - https://op3.dev/privacy

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Key Takeaways

1
Debt-to-income (DTI) ratio is a critical factor in mortgage approval, often more important than credit score alone.
DTI measures monthly debt payments relative to monthly income (e.g., $500 debt / $1,000 income = 50% DTI).
Lenders typically want DTI around or below 30% to ensure borrowers can manage additional housing debt.
A high credit score (750-800) will not overcome a poor DTI ratio during underwriting.
2
To improve DTI ratio, either increase income, decrease debt, or do both.
Paying down existing debt before applying for a mortgage improves approval odds.
Increasing steady W-2 income (raises, new jobs) is more reliable than side hustle income for lenders.
Self-employed income is harder to qualify with unless it has been consistent for over a year.
3
Avoid rushing into home buying based solely on credit score; evaluate DTI first.
Tiffany delayed her own home purchase to lower debt and raise income before applying.
High credit scores can create false confidence if DTI is too high.
Other underwriting factors exist beyond credit score and DTI, but these two are primary.
4
Self-employment can complicate mortgage approval compared to traditional W-2 employment.
Lenders scrutinize self-employed income more heavily and may exclude recent or inconsistent earnings.
Staying on a W-2 job until after closing on real estate is often strategically wiser.
Tiffany shares personal experience struggling with loans after leaving traditional employment.

Intro

In this Tiffany's Take episode, Tiffany Grant answers a listener question about debt-to-income ratio and its role in the home buying process.
Tiffany Grant is a financial coach and host of the Money Talk with Tiff podcast, focused on practical personal finance education.

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– Introduction & Question Setup

Tiffany introduces the episode format where she answers listener-submitted money questions every Tuesday.

Today's question: What is debt-to-income ratio and why does it matter?

– Defining Debt-to-Income Ratio

DTI is the ratio of monthly debt payments to monthly income.

Let's say you have a thousand dollars a month coming in and you have five hundred dollars in debt payments. That means your debt to income ratio is point five zero or 50 percent.
– Tiffany

Lenders want DTI around or below 30% when evaluating mortgage applications.

– Why Lenders Care About DTI

Lenders assess whether borrowers can handle additional debt payments based on current obligations.

If this person can barely make ends meet with the debt that they currently have, why should we give them more money to lend?
– Tiffany

Credit score matters, but DTI can disqualify applicants even with excellent credit (750-800).

– How to Lower Your DTI Ratio

Options include paying down debt, increasing income, or both.

Tiffany recommends holding off on house hunting until DTI is in an approvable range.

Don't feel pressured to apply just because you have a seven something credit score, 800 credit score. Look at your debt to income ratio and see if it makes sense.
– Tiffany

– Income Considerations for Self-Employed Borrowers

Lenders typically require consistent self-employment income for over a year to count it.

It's harder to get approved for real estate loans when you are self-employed.
– Tiffany

Tiffany advises staying on a W-2 job until after closing on real estate to improve approval chances.

– Closing Thoughts

Credit score is only one piece; DTI is another critical factor in mortgage approval.

Listeners can submit future questions at moneytalkwitht.com/asktiffany.

Resources

Topics

Debt-to-Income RatioMortgage ApprovalPersonal FinanceCredit ScoresHome BuyingSelf-Employment IncomeFinancial Coaching Debt ManagementLending CriteriaW-2 vs Self-Employed