How to Calculate Your Debt-to-Income Ratio

The most important number to know before you start thinking about getting a mortgage is your debt-to-income ratio (DTI). It’s easy to calculate, and it’ll tell you two important things: first, whether or not you’re likely to qualify for a mortgage; second, what mortgage payments (and what price range) you’re going to be able to afford on your home.

To calculate your DTI, all you have to do is add up all your monthly debts, including your expected future mortgage payment, and divide that number by your gross monthly income (before taxes). Then, multiply that number by 100 to get a percentage. It looks like this:

What counts as a monthly debt? Monthly debts are any payments that are recurring and required. When you’re adding up your total monthly debt, make sure you include things like:

• car payments
• home insurance premiums
• minimum credit card payments
• court-ordered payments like alimony or child support
• any other required payments like student debt or medical debt
• your expected future house payments, including mortgage, home insurance, property taxes, HOA fees, and maintenance fees

Expenses like food, clothing, utilities, health insurance, phone bills, travel, entertainment, contributions to savings or retirement funds, school tuition that is not financed via loans, or any other non-required non-debt payments are not included when calculating DTI. Your current rent, HOA payments, maintenance fees, or mortgage payments on your current house also don’t count towards your DTI for a future mortgage. 

For example, let’s say I make $5000 a month in gross income. Every month, I make a car payment ($150), a minimum payment on my credit card debt ($125), and a payment towards my student loans ($200). I’m looking at buying a house for around $200,000, so my future mortgage payment will probably be around $950, with $200 a month in property taxes and $100 a month in home insurance. Assuming I don’t buy into an HOA and I don’t have any maintenance fees, my DTI will be:

Ideally, your DTI will be mid-30% to 40%. In general, 43% - 47% DTI is the upper range for most mortgages, although some lenders or mortgage types may be able to accommodate higher DTIs. 

If your debt-to-income ratio is too high right now, that’s okay! Focus on paying down one or more of your debts to lower or eliminate some of your monthly payments. You can also consider lowering your price range to lower your future monthly house payments. When in doubt, call a loan officer! They'll be able to help you figure out what debts to include, what mortgages will work for your finances, and what your budget should be when shopping for your dream home.

Photo by Kelly Sikkema on Unsplash.