How is Debt-to-Income Ratio Calculated?

Lenders typically calculate your debt-to-income ratio to determine how much you can realistically pay for a monthly mortgage payment. In general, a high debt-to-income ratio makes it more difficult for you to obtain financing to buy a house.

How Much Debt Do You Have?

The simplest way to calculate your debt-to-income ratio is to add up your existing monthly debt obligations and divide this total by your gross monthly income. It’s important to consider all your monthly recurring debt payments, including:

• Mortgage payments or rent
• Car loans
• Student loans and personal loans
• Credit card payments or line of credit payments
• Child or spousal support payments
• Other monthly obligations, such as payments on back taxes owed or medical bills

What Should Your Debt-to-Income Ratio Be?

Most lenders have their own methods for determining whether to lend money to an applicant, with the debt-to-income ratio being one of several factors considered. Some lenders will not give loans to borrowers with a debt-to-income ratio exceeding 35 percent. Others allow for a higher debt-to-income ratio, particularly for borrowers with a high gross monthly income as these borrowers are more likely to be able to afford monthly payments without financial hardship.

In general, the lower your debt-to-income ratio, the better. Borrowers with a low debt-to-income ratio are more attractive to lenders, as they have more breathing room for unexpected expenses. In other words, a higher-than-anticipated cell phone bill doesn’t mean these borrowers won’t be able to pay their mortgage. Borrowers with a high debt-to-income ratio don’t have much breathing room for unexpected expenses, so they’re a riskier investment in lenders’ eyes.

Calculate Your Debt-to-Income Ratio

While calculating your debt-to-income ratio is pretty straightforward, there are several online calculators and tools with varying levels of complexity that you can also use. Bankrate’s tool allows you to simply enter your recurring monthly debt (or the total amount paid towards debts monthly) and your gross monthly income. Others are more complex and help you determine your total recurring debts by asking for individual items such as rent or mortgage payments, vehicle payments, other loan payments, credit cards, income from employment, and so on.

The Redfin Home Affordability Calculator uses your annual income, down payment, and recurring monthly payments to estimate how much you can afford to pay for a house in your area.

When you’re ready to start looking for homes, get in touch with a Redfin real estate agent, who can help you find a great home in your price range.