home buying snacks

DTI DIY yay!!!

and for my most fun post yet! 

how to calculate DTI and use it to see how much of a monthly mortgage you can afford!! 

just so you know, different types of loans will give you different maximum DTI that they allow. for this post we will be using 43%, which is common, but again it can vary. 

to calculate your current DTI (as i have explained in a previous post is very good to know so you can be prepared for what comes next in your home buying journey) is easy:

add up all your monthly debts you owe for credit cards and other loans (like car, personal, student, etc). remember that number. 

now figure out how much you make in a month before taxes. 

got it? okay. 

now divide your monthly debt by your monthly income. if you don’t remember how to switch from a decimal to a percent in your head, you can multiply that decimal you get by 100 and you’ve got your %!

example:

  1. $50 credit card + $50 credit card + $250 car payment = $350 debt
  2. $25 an hour x 30 hrs a week = $750 x 4 (for four weeks in a month) = $3000 a month income
  3. 350/3000 = .1166 x 100 = 11.66, or  11.66 % current DTI! 

great! my DTI is well below the max allowable 43% so how do i figure out how much of a monthly mortgage i can afford while staying under that 43% ?

funny you should ask! i’ll show you!

first, make yourself a chart like this: (you don’t have to write the explanations obviously)


then, fill it in accordingly:


TA DA! now you know how to calculate DTI and use it to see what you can afford to pay each month for a mortgage! 

if the payment is less than you were hoping, seeing this all written out can help you come up with a plan to get rid of some of your debt to decrease your DTI. 

this was so helpful to me while trying to get financially fit. i would write out this chart several times, each time leaving some debt omitted and watched my max payment go up and up: 

it really gave me a kick in the pants to pay off some of my debts. plus, it was really exciting to do the chart again once i had actually paid off some debt because i knew i could afford what i wanted. 

this is such a great exercise to do before you start calling for preapproval. it’s very empowering knowing your situation and being able to ask for exactly what you want and knowing there’s a good chance at getting it, instead of wondering or having someone tell you it’s not possible. 

again, it’s better to know where you’re at before you start the preapproval process and especially before you start looking at houses. knowledge is power! 

HAPPY MATH-ing ! 

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