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Need to catch up? Click on the link where you left off and then come back!
Day 1: Homebuying Goals
Day 2: Purchasing Methods
Day 3: Your Capacity
Day 4: Qualifying Income
This Week’s Goal: To learn homebuying basics including the various methods of purchasing a home and, if you choose a mortgage, how lenders review your income to determine how much you can afford.
Day 5: Debt-to-Income
Today’s Easy Financial Task: Learn how to calculate your debt-to-income ratio.
How to rock this task:
- Watch the video on DTI.
- Take out your worksheet pages from yesterday.
- Learn what your debt-to-income (DTI) is.
- Calculate your DTI.
Woot woot! Day 5, and the final day of the first week!
Today we’re going to be using the worksheet you filled out yesterday. If you haven't already, download it here: Qualifying Income and DTI Worksheet (Page 1).
This task considers how debt comes into the picture. Besides your income, lenders look at your debt to see if you can manage a mortgage payment. Lenders use a special equation called the debt-to-income ratio, or DTI.
The first task of the day is to watch the video! Watch below.
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What’s the DTI?
DTI is a ratio that compares the income you bring in each month to the monthly debts you pay. Here’s the equation to calculate your DTI:
Monthly debt payments / Income (the qualifying income you wrote down yesterday) = DTI
Examples of monthly debt responsibilities include:
- Auto loan payments
- Student loan payments
- Personal loan payments
- Child support or alimony payments
- Minimum credit card payments
- Existing mortgage payments
Write Down Your Monthly Debts
After watching the video, pull out your worksheets from yesterday.
There’s a space for your monthly debts. Write them out. You may need to pull out your bills to be as accurate as possible. Once you’ve finished listing your monthly debt payments, you can move on to the next step.
Calculate Your DTI
The next step is to calculate your DTI using the monthly income and debt payments on your worksheet. Make sure you revisit Day 4’s task to complete the qualifying income portion. There are specific types of income that you should be writing down in this column.
When calculating your DTI, you want to ensure your 50%, 43%, etc calculation INCLUDES your projected mortgage payment.
(Based on your budget you should know how much you can afford to pay, you will not let a mortgage lender dictate this to you)
So, if your DTI is 50% and you haven't even included your mortgage, that means you gotta get that down.
Re-do the calculation based on how much you'd like to pay in mortgage payments per month
What’s your DTI?
If you feel comfortable, share your DTI with your accountability partner(s).
Different mortgage products have different requirements of what your DTI can be to qualify. As a rule of thumb, your DTI should be less than 43 percent. Again, this limit can vary per product, and lenders may require a different DTI before approving you for a mortgage.
We’ve reached the end of Day 5 and the end of the tasks for this week!
Tomorrow, you’ll review the tasks from the last five days.
Leave a comment below or reach out to your accountability partners if you have any questions.
Share what you’ve learned today with your tweeps:Today I learned how to calculate my DTI. Day 5: #LiveRicherChallenge Click To Tweet
You can reach out to me here:
Facebook: The Budgetnista
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Want the LIVE RICHER Challenge: Homebuying Edition in book form? You can find it here: LIVE RICHER Challenge: Homebuying Edition.
P.S. If you haven't already... Get your Challenge Freebies from our Live Richer Challenge: Homebuying Edition co-author, Netiva Heard.
P.S. Have you saved, printed & posted the LRC: Homebuying Edition Calendar yet? It makes for an awesome checklist. Click on the picture, save & print it today.
P.P.S. Don’t forget to get your free Live Richer Challenge: Homebuying Edition Starter Kit. Download it HERE.