While buyers are in the process of obtaining a mortgage for a home purchase, their debt to income ratios are an important part of determining whether they will qualify for a mortgage or not.  It may not be something that you have ever thought or heard about before beginning your home search.  Let’s learn about the basics of debt to income ratio.

What is debt to income ratio?

Debt to income ratio is a calculation that compares the total amount of debt you have per month over your gross monthly income.

In simplest terms, you can add up all the debts you have per month (mortgage payment, auto payments, insurance, personal loans, student loans, credit cards) and divide it by your gross monthly income.  Your gross monthly income is the total amount of money you earn in a month before taxes and other deductions.

This resulting percentage is used by lenders to determine if you qualify for a mortgage.

For example:
Your gross monthly income is $7,500.
Your debts for a month total $3,200.
Your debt to income ratio is 42%.

Here is a debt to income ratio calculator you can use that provides further guidance for what to include or not to include in your figures.

Why is debt to income ratio important to lenders?

This ratio shows lenders to you are able to make monthly mortgage payments in addition to your other debts.  While different lenders and loan programs will have a targeted percentage you must fall below to qualify for a loan, most lenders typically look for a ratio below thirty six percent.

What if my debt to income ratio is too high?

Speak with your mortgage lender to get some suggestions for how to decrease your ratio.  You may need to do things like pay off a loan with high interest rates first  or decrease your monthly spending on non necessities (eating out, entertainment, ect.) to focus on paying off debt.  After implementing these changes for a few months, your debt to income ratio may change.  

Debt to income ratio also changes with the price point of a home.  You may consider homes with a lower price point than what you originally intended to purchase.