How to Calculate the Debt Ratio for a Mortgage
One of the most important ratios used by mortgage lenders to determine a borrower's ability to repay a new mortgage debt is known as the debt-to-income ratio, or DTI. This ratio is calculated both prior to the new mortgage, known as the front-end DTI, and after the new debt is added, known as the back-end DTI. A lender would like to see a borrower's back-end DTI to be 36 percent or less; however, certain mortgage programs allow the back-end ratio to be as high as 50 percent.
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Instructions
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1
List all of your monthly debt payments, such as car payment, mortgage, credit card payments, student loans, installment loans, child support payments, and any other loan or debt payment that you pay monthly. Add them together to create your total monthly debt payment. If you are married, add in each partner's debts.
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2
Calculate your monthly income. If you are on salaried income, divide your yearly salary by 12. If you are a full-time hourly worker, multiply your hourly wage by 40 (hours per week). Then, multiply that total by 52 (weeks per year). Divide that number by 12 to get your average monthly salary. Remember to use your pre-tax income for your total monthly salary. If you are married, add in each partner's incomes.
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3
Divide your total monthly income (total from Step 2) by your total monthly debt (total from Step 1). The result is your DTI. Multiply the decimal by 100 to get a percentage, if desired.
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Tips & Warnings
Commissioned employees have a harder time finding monthly income. Average two years of income and divide that number by 12 to find your monthly income. The same rule applies to self-employed borrowers.
If your debt-to-income ration is too high to get a mortgage, consider paying off other debts first in order to qualify for a mortgage in the future.
References
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