Debt To Income Formula
This is a VERY important & critical part of the affordability process that determines what you can or cannot afford. Your DTI is expressed as a percentage & is your total “minimum” monthly debt divided by your gross monthly income. Lenders have different guidelines that they follow*. The conventional limit for DTI is 36% of your monthly income, but this could be as high as 43% for some loans. A DTI of 20% or below is considered excellent & although this would be awesome & save you a lot of money, it’s also rare, so don’t think you have to have your DTI at or near 20% before you begin.
It’s in part what all financiers use to determine your financial qualifications. In reality, lenders evaluate how much additional debt you can handle & how much of a credit risk you pose. It’s a common practice in the finance world, but usually home buyers are unaware of this critical information. It’s a valuable formula for everyone & easy to determine. The Debt to Income ratio is used with consumer loans, credit cards, loan officers & other financial institutions.
To calculate your ratio:
- Determine your monthly debts, which will include your new house payment, & other monthly debts like credit card minimum payments, student loans, car loans, alimony, child support, personal loan, etc.
- Now divide this number by your gross monthly income including all income that can be documented through pay stubs or your tax return. You can use a mortgage calculator to help you with your estimation.
The formula is:
Debt to Income = Monthly Debt Payments ÷ Gross Monthly Income
For example, if you have a $3,400 monthly gross income.
$3,400 (gross monthly income) X .36 (generally recommended maximum DTI)
= $1,224 (amount your total monthly debt payments should generally not exceed)
*IMPORTANT: The standard rule of thumb is that your DTI ratio should be less than 36 % since lenders generally require that borrowers have a DTI ration no higher than 40% in order to qualify for a mortgage. A DTI ratio as high as 36% puts you at risk of paying higher interest rates or being denied altogether. Note that certain types of mortgages may allow a DTI ratio above 40%, such as certain Federal Housing Authority & Veterans Administrative mortgages.
When it comes to finding the right real estate agent, there is none better than a Realtor like Laura Hill who cares & fights for her clients. https://www.localtexasrealestate.com.