Your debt-to-income ratio is important because lenders look at it to determine whether you’re eligible for a loan.
In order to calculate your debt-to-income ratio, you’ll need to add up most of your monthly expenses. Don’t forget to include:
- Credit card bills
- Car payments
- Student loans
- Personal loans
The final expense that the bank adds into your debt is your potential new mortgage payment. Make sure you include that in order to get an accurate picture.
Let’s say you have $500 in current monthly debt and you want a $1,000 per month mortgage payment.
Your total debt will be $1,500 under this scenario as far as your lender is concerned.
Now add up all of your sources of income. You can, but don’t have to, include child support or alimony if you have a court order mandating that you receive either.
You’re looking at gross monthly income (the amount you make before taxes).
Let’s say your monthly income is $5,000.
How Lenders Calculate Debt-to-Income Ratios
To get your debt-to-income ratio, lenders divide your total monthly debt by your gross monthly income. In this scenario, the banks will divide $1,500 by $5,000 to arrive at 30 percent. ($1,500/$5,000 = 0.3)
It’s important to note that lenders want your debt-to-income ratio to be below 36 percent, so in this case, they may approve you for a loan that requires a mortgage payment of $1,000 per month. Naturally, other factors such as your credit score play a major role in a lender’s decision.