Calculating Your Debt-To-Income (DTI) Ratio

Calculating your debt-to-income (DTI) ratio is an important step in assessing your financial health and determining your eligibility for a  mortgage. Your DTI ratio measures the percentage of your monthly gross income that goes towards paying debts. Lenders use this ratio to evaluate your ability to manage additional debt responsibly.

To calculate your DTI ratio, follow these steps:

• Determine your monthly gross income: Start by adding up all your sources of income before any deductions or taxes. Include your salary, wages, bonuses, rental income, alimony, and any other regular sources of income.
• Calculate your total monthly debts: Sum up all your monthly debt payments. Include items such as mortgage or rent, car loans, student loans, credit card minimum payments, personal loans, and any other regular monthly debt obligations.
• Divide your total monthly debts by your monthly gross income: Divide the total amount of your monthly debts by your monthly gross income, then multiply the result by 100 to get the percentage.
  DTI Ratio = (Total Monthly Debts / Monthly Gross Income) * 100

For example, if your total monthly debts (including rent/mortgage, car loan, student loan, and credit card payments) amount to $2,500, and your monthly gross income is $6,000, the DTI ratio would be:

DTI Ratio = ($2,500 / $6,000) * 100 ≈ 41.67%

Your calculated DTI ratio represents the percentage of your income dedicated to paying debts. The lower the DTI ratio, the better, as it indicates you have a more manageable level of debt in proportion to your income. Lenders typically prefer borrowers with DTI ratios of 43% or lower, but some loans may have specific requirements or allow higher DTI ratios under certain circumstances. Of that 43%, no more than 28% or less should be dedicated to your new mortgage payment.

Remember that the DTI ratio is just one aspect of your financial profile that lenders consider when evaluating loan applications. They will also assess other factors, such as credit score, employment history, and down payment amount, to make their lending decisions.

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