Know Your Debt-to-Income Ratio
In addition to your income, mortgage lenders calculate your debt-to-income ratio (DTI) to estimate the likelihood that you will be able to repay your mortgage loan. Your DTI shows how much you owe (your debts) compared to how much you make (your income).
Even if you have no plans to buy a home, it still can be helpful to calculate your debt-to-income ratio for a better understanding of how your debt impacts your ability to meet other obligations.
To calculate your DTI:
- Total all of your monthly debt – include your mortgage, all loans (home equity, car, student, etc.), the minimum monthly payments on all credit cards, and any other recurring debts for child support, alimony, personal loans, etc.
- Divide this figure by your gross monthly income (before taxes and any other adjustments).
- The amount, expressed as a percentage, is your debt-to-income ratio. It shows the percentage of your earnings that are used to pay your debts.
Monthly debt obligations = $800
Monthly gross income = $4,000
800 / 4,000 = 0.20
(move the decimal two places to the right)
= 20 percent