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Debt to income ratio: How can you calculate it?

Posted on: 30th Jun, 2004 12:33 am
A debt-to-income ratio or back-end ratio shows the percentage of a person's monthly income that goes towards payment of debts like mortgage loan and car loan, child support and alimony, credit card bills, student loans, and other types of credit. It is evaluated as an individual's total monthly debt divided by gross monthly income.

To Sum Up,
"Debt-to-Income Ratio = Total Monthly Debt / Gross Monthly Income"
Generally, lenders do not approve a mortgage loan if the ratio exceeds 36% of your monthly gross income.

For example, A home-buyer makes $10,000 a month. The maximum amount of monthly debt payment at 36% of gross income would be $3600. Thus, the homebuyer would be approved for a mortgage which requires a maximum of total debt payment of $3,600.

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Debt to income ratio
Debt to income ratio also helps to judge whether a person is having a debt burden that is more than his current income. Sometimes it may happen that you are not aware that you are in lot of debt and it is out of any reasonable proportion to your income.

Thus constant monitoring of the DTI also helps to know the gradual increase in debt and avoid major credit problems before they actually occur.
Posted on: 21st Dec, 2006 01:25 pm
One thing I would like to add is that, as a common prerequisite borrowers are required to ideally have a debt to income ratio of 28/36 while applying for mortgage. But in case of FHA loans generally the ratio is 29/41.
Posted on: 26th Jan, 2007 12:14 pm
Your Debt to Income ratio can have a very dramatic affect on your ability to obtain a loan. Lenders will look at this ratio as well as your credit score. They want to ensure that you will be able to repay the loan. There are two important ratios that most lenders use to determine your ability to repay.

1. Back End
2. Front End
Posted on: 01st Feb, 2007 09:16 pm
Yes Davy, debt to income ratio may not be as important as credit scores but then they do play a key role in evaluating one's ability to manage a loan. Whether one qualifies for the loan and how much one can borrow, depend upon your debt to income ratio.

Lenders will surely check a borrower's debt to income ratio and decide whether they'll lend him money for a home loan or an auto loan.

The borrower has fair chance to negotiate with lenders provided he has a low debt to income ratio even if he doesn't have factors like credit score, payment history etc in his favor.

Thanks.
Posted on: 02nd Feb, 2007 02:13 am
Okay so what if someone has very low debt of 150.00 a month for two small credit cards and 4,300 gross monthly and has paid off some collections in full a good 12 months prior to applying for an FHA loan or any other (once my score gets higher) What would my ratio look like? I don't understand the last number.

Do I have a good shot at getting a loan at least up to 200,000? I'm married but my husband won't be going on the loan since his finances are a mess and we will attempt to clear some of it up. If I put him on I will surely be denied. Will they factor in that I won't be living alone and my husband splits payments with me as he does now?

PS. I am childfree and will remain that way and a great job that gives raises every year.
Posted on: 14th Sep, 2007 09:53 pm
Hi Vertigo,

You may get a loan. But for that, the lender will like to know about your debt-to-income ratio. So, considering your debts and income, you can calculate your debt-to-income ratio by using this calculator http://www.mortgagefit.com/calculators/diratio.html

Moreover, your husband can help you with the loan payments. But as he will not be named on the loan, it will not be his obligation to make the payments. He can anytime split payments with you and in that case you will have to continue the payments of your own.
Posted on: 15th Sep, 2007 12:16 am
Hi Larry, my debt to income ratio is 7%. I will have very low credit card payments because I only use them to spend 10 to 60.00 a month and pay more then the minimum.
Posted on: 15th Sep, 2007 05:25 pm
Vertigo,

Based upon what you have shared, you could certainly begin to entertain a FHA loan---the program doesn't concern itself with your credit score and as mentioned above, you are allowed a higher qualifying front & back end ratios (translated, you can qualify for a higher mortgage amount using FHA then you can using most conforming programs).

A 200,000 mortgage would require a PI (principal & interest) payment of approx. 1347.00---it's difficult to say that you would qualify for this loan amount without reviewing all of your debt burden (car loans, bank loans, student loans, installment loans, etc.) and your husband's income/debt circumstances...

Based upon the limited info you have provided, it sounds like you would need both of your incomes to qualify for this level of mortgage.

Regards,

Scott Miller
Posted on: 15th Sep, 2007 07:58 pm
Hi Vertigo,

It's good that you have low credit card payments as in that case, you won't have to face much trouble in getting a loan. But before approving you a loan, the lender will look at your entire financial situation, including your debt-to-income ratio and also your credit score in case if it is not a conforming loan. Moreover, have you check out your current credit score? I suppose once it went down because of some collection account that you have mentioned earlier. So, I think you should start shopping for lender and get the best loan program suiting your needs.

It's good to hear that you have a great income. It may help you to get a greater loan amount.

Hope you best of luck!
Posted on: 17th Sep, 2007 01:35 am
Posted on: 12th Mar, 2009 12:22 pm
Hi tafolla,

The dti for conventional mortgage is around 28/36 and for FHA, it is 31/43. Anything more than that is not considered to be good.

Thanks
Posted on: 12th Mar, 2009 11:13 pm
tafolla, i would think that you're not in a bad position to obtain modification with a 43 back ratio. of course, that's not going to be the only variable that your lender will consider.
i think james' answer corresponds more closely to the purchase market than to one thinking of a modification.
Posted on: 14th Mar, 2009 05:48 am
i do i get my number lower? i paying my on my student loans and medical bills and will be finish this year the only hang up is my car note cause i co sign with my husband
Posted on: 23rd Jun, 2009 12:57 pm
This 36% debt ratio is rediculous and I can't believe banks are approving loans for those who wish to carry this much debt. Maybe that's why the country is having financial challenges. I'm at a 9% debt ratio and can't fathom what the banks recommend.

ADVICE: Pay off your debts, save a minimum of 20% for a down payment, save for a 6 month emergency fund, and then buy a house.
Posted on: 25th Sep, 2009 12:49 pm
conservative, you're blessed to have such little debt. in all honesty, 36% ratios were not the cause of our mortgage problems in the last few years. there's much more to it than that. much, much more.

in fact, for many, many years 36% was the maximum allowable, and it worked out pretty darned well for a long time. when property values began to escalate and the no-documentation kind of loans came into vogue, that ratio went the way of the wagon train. i don't disagree with your advice - it's stellar.

and i know you can't fathom it...but you are truly the exception to the rule. congratulations on that...i wish i could say the same thing right now that you said.
Posted on: 25th Sep, 2009 03:15 pm
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