Debt to Income Ratio: One factor examined when applying for home financing

Debt to Income

Applying for a loan, among other factors, involves providing personal financial information to a lender. Although institutions may have differing requirements, you’ll quite likely have to provide a summary of your monthly gross income and expenses. These figures provide your Debt to Income Ratio.

To arrive at your income to debt ratio:

  1. Add you total expenses for the month. Freddie Mac provides an organized budget form that will make this chore a bit easier.
  2. Add your total monthly gross income.
  3. Divide your total monthly expenses by your total monthly income
  4. The resulting number indicates your debt to income ration

As an example: If your total monthly expenses are $2200 and your monthly gross income is $4000, your debt to income ratio is 55 percent. If two people will be applying for a loan together, expenses and income should be based on both incomes and all expenses.

Many lenders consider a debt to income ratio of 36% or less to be acceptable. To reach this level, you may have to increase your income, decrease your debt, or both. Another reasonable suggestion would be to keep your mortgage payment to 25% of your gross monthly income.

When thinking affordability, you need to consider your mortgage payment + taxes + home owner’s insurance costs. Many lenders require taxes be included in your monthly payments. In this instance, your mortgage and taxes are combined into one payment usually.

Mortgage App

Here is a list of suggested mortgage professionals able to answer your questions and advise you on financing options.