Calculations 101
Step 1 - DTI
Lenders use a simple Debt-to-Income (DTI) ratio to determine if a homeowner can afford the additional debt of a remodeling project.
DTI
Enter Your Total Monthly Expenses $
Add the Estimated Monthly Payment for the Remodeling
Project + $
Total = $
Divide the Total by Your Gross Monthly Income... $
DTI % =
Each lender will approve loans at a specific DTI percentage (most lenders will tell you what their set DTI ratio is, if you ask). For example, if the lender accepts DTI ratios of 45 percent and your DTI ratio is 30 percent, your loan would be approved. However, if your DTI ratio is 55 percent, you would need to find other financing options. Perhaps your lender offers debt consolidation loans that could reduce your DTI ratio, which brings us to the next step:
Step 2 - The Maximum Payment
The next step is to determine the maximum monthly payment you can afford for remodeling. Multiply your monthly gross income amount by the lender's maximum DTI allowance, and subtract your current total monthly expenses, excluding the estimated remodeling payment.
Gross Monthly Income $
Lender's DTI ratio x
Subtotal = $
Total Monthly Expenses - $
Maximum Affordable Payment = $
If the last line is negative, you will not be able to borrow from that lender. See step 3 for further options.
STEP 3 - Consolidation
If your DTI ratio was above the lender's accepted percentage, or if your maximum affordable payment was too low, you may want to consider a debt consolidation loan. This would incorporate your current debts into the home improvement loan. Not only does this allow you to roll your debts into what may be a tax deductible loan, it also provides one easy payment for your debts and lowers your DTI percentage. In addition, the interest rate on a debt consolidation loan may be lower, which will save you additional money.
Calculations 101
