Understanding the Impact of Debt-to-Income Ratio on a Mortgage Loan

Here’s how you can explain this concept to borrowers.

As a home finance professional, you might not be surprised to hear that financial literacy is slipping across the nation. Levels have hovered around 50%, which is not great to begin with, for close to a decade. But, over the past two years, they’ve dropped another 2%.

The reality is that the average consumer has a tenuous grasp on most financial concepts, whether that’s understanding compounding interest or high-yield savings accounts.

That’s where you come in! In today’s landscape, mortgage professionals who can impart knowledge while doing their usual duties of helping to try and secure loans for their clients could see higher satisfaction rates, better reviews, potential referral business, and overall company growth. Not to mention, your clients will likely fare much better as they navigate their financial futures.

So, how do you go about meeting borrowers where they’re at? By clearly explaining the critical financial concepts they need to know. While these might seem simple to you, for your clients, they’re probably hazy at best.

Let’s start with an important and often misunderstood one: The debt-to-income (DTI) ratio.

Explaining the Impact of Debt-to-Income Ratio on a Mortgage Loan

Remember: While you deal with these concepts day in and day-out, most borrowers will probably not be as familiar. That’s why it’s essential to start with a clear, simple definition of the debt-to-income ratio.

Here’s a sample script you can use:

“Your debt-to-income ratio, or DTI, is a basic comparison of the money you earn each month and the money you spend each month on recurring debts. Basically, you take all of your monthly debt payments (projected mortgage payment, car loan payment, student loan payment, credit card payment, and more) and divide it by your gross (pre-tax) monthly income. Then, you multiply that figure by 100 to get your DTI percentage.”

Running the Numbers

To further their understanding, grab a pen and paper. You can walk clients or would be clients through an imaginary scenario or use some of their real stats.

A handout they can take home might help here but even a simple sticky note with the below equation written on it could go a long way in deepening their knowledge:

Debt expenses / gross income x 100 = DTI percentage

Then, when they understand the mechanics of the measurement, it might be a good time to cover what might be considered a more desirable DTI for loan qualification purposes (generally no more than 43% and ideally 36% or less).

Providing Emotional Support

Homebuying (and debt) can be extremely emotional. If a client learns that their debt-to-income ratio isn’t conducive to a purchase right now, there’s a good chance they’ll have an emotional response.

This is where the truly great mortgage professionals are separated from the pack.

Become a shoulder to cry on, if needed. Validate their feelings but reassure them that there is in fact a path forward.

Sharing Strategies to Improve

Once your clients are feeling a bit better, it’s time to take action. Make a point to share some strategies to improve their debt-to-income ratio, if needed.

As you know, there are really only two avenues:

Paying Down Debt

Most consumers simply don’t understand compound interest, including how it applies to their debts. Providing some education and support here could empower your clients to make a change, bump up their payments, and work toward an improved DTI.

Increasing Income

Maybe you suggest a side hustle or a request for a raise. This one isn’t always quite as clear cut as, say, paying off their credit cards, but it’s still important to discuss. Any additional income can help tip their DTI in a more favorable direction.

Of course, if they can do both, even better! Either way, ensure your clients walk away with concrete next steps to improve their DTI and hopefully get that much closer to homeownership.

Monitoring Progress

Remember, this concept is probably brand new to most of your clients and would be clients.

Check in often to gauge how they’re doing and perhaps encourage them to run some new numbers. This is where the equation on that sticky note will really come in handy.

Your interest and care will build confidence and trust, as well as allow them to act quickly as soon as their DTI meaningfully improves.

Final Thoughts: The Impact of Debt-to-Income Ratio on a Mortgage Loan

You know just how critical a favorable DTI can be when it comes to securing a home loan. The problem is, though, that your clients and would be clients may not.

In an age where average debt is sky-high and average wages simply aren’t keeping up, explaining this concept to your clients and would be clients is more important than ever. By providing a clear definition, running some numbers, providing emotional support, sharing a few strategies to improve, and checking in often, you can educate and empower them while driving them that much closer to homeownership. Now that’s work you can be proud of!

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