Mortgage lenders use your debt to income ratio to calculate what percentage of your income is available for your monthly mortgage payment after all of your other monthly fixed expenses are paid.
To calculate your total debt to income ratio take your total monthly fixed expenses and divide it by your gross monthly income.
Monthly fixed expenses are debts like your monthly mortgage payment, lease or car payment, credit card and any other revolving credit balances that will take more than eleven months to pay off and alimony or child support.
Your gross monthly income is what you make before taxes are taken out. This includes your wages overtime, commissions or any bonuses you get on a regular basis.
Your total monthly fixed expenses divided by your gross monthly income is your total debt to income ratio. It's what a lender calls the back end of debt ratio.
If you remove the monthly mortgage payment that is what a lender calls the front end debt ratio and that is how they calculate how much of a monthly mortgage payment you qualify for.
When you total your monthly debts, make sure you use only the minimum payment on your credit card statements. You don't have to include utility bills or any debt that will be paid off in fewer than eleven months.
Here is a sample debt to income ratio calculation:
Total Gross Monthly Household Income = $6,000
Total Monthly Fixed Expenses = $2,160
$2,160 Divided By $6,000 = 36
Total Debt To Income Ratio = 36%
A mortgage lender likes to see your front end debt ratio between 25% and 28% to qualify for a mortgage loan. A good total debt to income ratio with that monthly mortgage payment factored in should not exceed more than 45%.
These figures can go higher if you have a high credit score because that means you have better creditworthiness and will likely pass a lenders home loan guidelines easier.
That's how to figure debt to income ratio and why it is important especially when you apply for a home loan.
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