Debt-To-Income Ratio – What It Is and How to Calculate?
When you apply for a mortgage, you will come across the term debt-to-income ratio (DTI). DTI is vital for mortgage approvals. It is one of the key factors in qualifying for the loan. However, many people don’t have a detailed understanding of the term.
Let us help you understand what debt-to-income ratio is and how to calculate?
What Is Debt-To-Income Ratio?
The percentage of your gross monthly income spent on monthly debt payments is your Debt-To-Income Ratio. Debts are payments such as credit cards, car loans, mortgage, student loan, and education loan. You can relate debt-to-income ratio to your credit score as both of them can impact your ability to qualify for a mortgage when you approach the mortgage lenders in MA.
How to Calculate Debt-To-Income Ratio?
Knowing your debt-to-income ratio is crucial. Follow the below-mentioned steps to calculate with example.
Step 1 – Add Fixed Debts
Add all your monthly fixed debts to get an idea about your fixed debts. The expense may include your house rent, mortgage payment, loan, credit card payments, etc. Expenses like groceries, gas, taxes, etc. are not considered while calculating the debt-to-income ratio.
Let us assume that you have the following monthly debts –
House Rent – $1,500
Car Loan Payment – $500
Monthly Credit Card Payment – $200
Total Monthly Fixed Debts – ($1,500 + $500 + $200) = $2200
Step 2 – Divide By Your Gross Income
After adding up your monthly fixed debts, divide the total fixed debts by your gross monthly income.
It is quite a straight forward calculation. However, we will consider the above example. Your total monthly fixed debts are $2200, and monthly gross payment is $5500, which comes out to 0.4.
Step 3 – Convert into a Ratio
Convert the answer into a percentage, and you will get the Debt-To-Income Ratio. If we consider the above example, the ratio comes out to 40%.
Always remember that the Debt-To-Income Ratio is directly proportional to the risk to the mortgage lenders. If you have a lower ratio, your case will be less risky to the mortgage lenders in MA. If you have any questions, contact our loan officers at Drew Mortgage Associates to get the answers.