Mortgage lenders consider your debt-to-income ratio (DTI) to be a good indicator of your ability to repay a home loan.
Essentially, this figure is a comparison of how much debt you have against how much money you earn. And as a general rule, lenders look for a debt-to-income ratio of no higher than 36 percent before approving a home loan.
To find out if you meet that mortgage qualification benchmark, calculate your DTI by following these four steps.
Add Up All of Your Debts
First, figure out the total amount of your monthly debts. Include the payments you make toward these obligations in this step of the debt-to-income ratio calculation process:
- Mortgage or rent
- Home equity loans
- Car loans
- Student loans
- Personal loans
- Child support
- Credit card minimums
This list of the debts that can factor into your DTI is not complete. To learn what your lender will consider, ask your home loan officer or mortgage broker.
Exclude Non-Factored Expenses
Some of your monthly obligations are not debts in the eyes of mortgage lenders. As such, they aren’t factors in the DTI calculation. The expenses you should leave out of your debt total include:
- Utility bills
- Insurance payments
- Cell phone bills
- Transportation costs
- Most taxes
Again, this is an incomplete list. If you’re not sure whether to include one of your monthly expenses when calculating your DTI, check with your home loan officer or mortgage broker
Determine Your Gross Income
Now you need to calculate your total monthly gross income, which is the amount you earn before any taxes are taken out.
If you have a single job, you can easily find this figure on your most recent paycheck. If you work for multiple employers or as an independent contractor, you can manually add up your earnings using your bank account statements. Or, if your income hasn’t changed, you can refer to last year’s tax return. You can follow this same approach to determining your gross income if you own a small business.
Divide Your Debts by Your Income
The final step to calculating your debt-to-income ratio and learning if you meet the lender cutoff for home loan approval is to divide your total monthly debts by your total monthly gross income.
As an example, let’s say that your debts each month – excluding any non-factored expenses – add up to $1,500, and that your gross monthly earnings are $5,000. Doing the math ($1,500/$5,000), you can see that your DTI would be 30 percent. And since that’s less than 36 percent, your DTI would be low enough to qualify for a home loan.
Do you have questions about home loans? The highly experienced mortgage brokers at Intercap Lending, serving home buyers in northern Utah, can provide expert answers and advice on how to secure a loan approval.
At Intercap Lending, our team of mortgage brokers understands what lenders are looking for, and we have extensive expertise with many mortgage programs. If you want more information on calculating your debt-to-income ratio or your home loan options, contact us today.