Debt to Income Ratio is Important to Lenders - Debt Ratio
What is my debt to income ratio or debt ratio?
Calculate your debt to income ratio or what percentage of your monthly income is used to pay fixed monthly costs. Enter your monthly income, monthly rent or mortgage expense, and other monthly expenses. This calculator will then show you your debt to income ratio which is the percentage your monthly income goes to pay monthly debts and expenses. In general, most mortgage lenders do not want your total monthly housing debt ratio or housing expenses (including property taxes, private mortgage insurance (PMI), and association dues) to exceed 28% of your total gross monthly income. And your total debt to income ratio percentage cannot exceed 36% of your total gross monthly income.
Why should I care what my debt to income ratio percentage (or simply debt ratio) is?
You should care what your debt to income ratio is because banks and other lenders care what it is! The bank doesn't want to loan you money if you can't afford to pay it back. Banks control their liability by checking that your debt payments commit only about 36% of your income as total monthly payments. The percentage of your income used to pay fixed monthly expenses like housing and car or other loan payments is your debt to income ratio or just debt ratio.
What are the general debt to income ratio guidelines for a mortgage loan?
When banks or lenders are considering a mortgage loan the total debt to income ratio (including housing) is unchanged at about 36%, but your housing debt ratio can generally be no higher than 28%, even if your total debt ratio is below the 36%. The housing debt ratio is just the percentage of your income that goes to pay your monthly mortagage payment or rent. When you have a lot of debt the debt to income ratio is the limiting factor in how much you can borrow, but when you have little to no debt, the limiting factor is the housing debt ratio.
What can you do before applying for a mortgage or loan to get your debt to income ratio under the bank's limits?
Run this calculator to see what your debt to income ratio actually is. Then:Use extra cash to pay off one or more loans to lower your debt ratio. Pay down your highest interest debt makes sense, but be careful to choose loans to pay off that will reduce your montly payments by an amount that will lower your debt to income ratio by enough to get you in the 36% and 28% range lenders want. Remember, the more you pay down your debt, the less you have available for a down payment, which may be critical if you're wanting a home mortgage. Banks and lenders generally will allow a higher debt to income ratio for a mortgage if you have 20% or more as a down payment on a home.
Consolidate loans to lower your montly payments, lowering your debt to income ratio percentage with it.
Consider your FICO credit score before deciding to get a consolidation loan. Lenders will consider your FICO score as well as your debt to income ratio. And new debt is not friendly to your FICO score, but if you have a strong credit score to begin with it probably won't make much difference.
TitleA title for these calculator results that will help you identify it if you have printed out several versions of the calculator.
Gross Monthly Salary/IncomeNormal monthly income, including taxes, but not including alimony, child support, etc.
Other Monthly IncomeOther monthly income such as alimony or child support.
Monthly Rent/MortgageThe amount you spend each month for rent or mortgage.
Car PaymentsThe total amount you spend each month for all car payments.
Credit Card PaymentsThe total amount you spend each month for all credit card payments.
Other Loan PaymentsThe total amount you spend each month for all loans (not to include mortgage).
Other Monthly PaymentsTotal of all other monthly obligations you have. (Examples are alimony, child support, legal judgment.)
Total Monthly IncomeTotal amount of 'Monthly Income' entered.
Total Monthly ExpensesTotal amount of 'Monthly Expenses' entered.
Housing Debt RatioThe percentage of your monthly income that goes to pay for housing.
Total Debt RatioThe percentage of your monthly income that goes to pay all your debt (including housing).