Debt-to-Income Ratio

When you’re in the process of applying for a mortgage, lenders will want to look at your debt-to-income ratio. Specifically, lenders are interested in what percentage of your monthly gross income goes toward paying your debts, which can include car payments, taxes and other mortgages. Lenders will also factor in your credit card debt.

The Debt-to-Income Ratio that Lenders Want

Typically, lenders want your DTI to be lower than 36 percent when it includes your potential mortgage payment, which means that no more than 36 percent of your monthly income will go toward paying your debts.

That figure includes your potential mortgage payment, so let’s look at it this way:

If you make $5,000 per month, and your total monthly debts total $1,000, you have a 20 percent debt-to-income ratio.

If you had $1,000 in other obligations and tacked on a mortgage payment of $800 per month, making your total monthly debts $1,800, you would have a 36 percent DTI ratio.

Here’s the math:

Your total monthly income (gross) x 0.36 = what will give you a 36 percent debt-to-income ratio

Let’s say you make $3,000 per month.

$3,000 x 0.36 = $1,080

That means the lender wants your total monthly debts, including your new mortgage payment, credit card bills and other obligations, to be lower than $1,080 per month.

Some lenders allow your debt-to-income ratio to be as high as 43 percent, but each financial institution has its own requirements; 36 percent is the norm.

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