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When you’re applying for a mortgage, understanding your Debt-to-Income Ratio (DTI) is one of the most important steps. As someone who works with mortgage applicants every day, I’ve seen how crucial this number can be in determining your eligibility and the type of mortgage you can secure. Let me walk you through what DTI is, why it matters, and how you can improve yours to get closer to your homeownership goals.
What Is the Debt-to-Income Ratio (DTI)?
Your DTI is a financial metric that compares your total monthly debt payments to your gross monthly income—the income you earn before taxes and deductions. It’s a simple calculation, but it speaks volumes to lenders about your financial health and how much additional debt you can handle responsibly.
The formula is straightforward:
How Canadian Lenders Use DTI
In Canada, lenders actually break down your DTI into two categories:
Gross Debt Service Ratio (GDS): This looks at just your housing-related costs, such as:
Mortgage payments
Property taxes
Heating costs
50% of condo fees (if applicable)
The rule of thumb: Lenders typically want your GDS to be no more than 39% of your gross income.
Total Debt Service Ratio (TDS): This includes everything from your GDS plus other debts, like:
Car payments
Credit card bills
Student loans
Personal loans
The maximum allowed: Most lenders cap TDS at 44% of your gross income.
Why DTI Matters
Your DTI is like a snapshot of your financial balance. A lower ratio shows lenders that you’re managing your debt well and likely have enough breathing room to take on a mortgage comfortably. On the flip side, a higher ratio might raise red flags, making it harder to qualify or limiting the amount you can borrow.
Beyond approval, your DTI can influence the terms of your mortgage. If you’re in great financial shape, you might secure a better interest rate or access to a higher loan amount.
How to Improve Your DTI
If your DTI is a bit higher than you’d like, don’t panic. I’ve helped clients in similar situations make adjustments to get their finances mortgage-ready. Here are some strategies that work:
Pay Down High-Interest Debt: Start with credit cards or other loans with high-interest rates. Reducing these balances can lower your monthly obligations and improve your TDS quickly.
Boost Your Income: Whether it’s asking for a raise, picking up extra hours, or starting a side hustle, increasing your income can make a significant difference. Rental income from a suite in your home can also count toward your total income.
Avoid New Debt: Hold off on applying for new loans or credit cards until after your mortgage is secured. New debt increases your TDS and can make lenders nervous.
Refinance Existing Loans: Consolidating or refinancing your loans into a lower-interest product can reduce your monthly payments.
Track and Trim Expenses: Review your budget for unnecessary spending. Apps like Mint or You Need a Budget (YNAB) can help you identify areas to cut back and allocate funds toward debt reduction.
A Few Things to Keep in Mind
Stress Testing: Lenders will also evaluate your finances under a higher interest rate to ensure you can handle future changes. This means your GDS and TDS need to meet thresholds at the qualifying rate, not just your contracted rate.
Exceptions: If your DTI is slightly above the limits but you have strong credit, substantial assets, or a large down payment, some lenders may still consider your application.
The Bottom Line
Your DTI isn’t just a number; it’s a reflection of your financial readiness for homeownership. By understanding how it works and making small, strategic changes, you can position yourself for mortgage success.
If you’re unsure about your DTI or want personalized advice on how to improve it, I’m here to help. Let’s work together to make your homeownership dreams a reality!
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