Debt-to-income ratio

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Debt-to-income ratio is the percentage of a consumer's monthly gross income that goes toward paying debts. It is usually expressed as two numbers. The first number indicates the percentage of income that goes toward paying off a mortgage principal and interest, mortgage insurance, hazard insurance, property taxes, and homeowner's association dues. The second number indicates the percentage of income that goes toward paying all recurring debts, including those covered by the first number, and other debts such as credit card payments, car loan payments, and child support payments.[1]

Most lenders require a debt-to-income ratio of 28/36 to qualify for a mortgage, but Federal Housing Administration loan ratios are typically 29/41.[2]

[edit] Example

In order to qualify for a mortgage for which the lender requires a debt-to-income ratio of 28/36:

  • Yearly Gross Income = $45,000 / Divided by 12 = $3,750 per month income.
    • $3,750 Monthly Income x .28 = $1,050 allowed for housing expense.
    • $3,750 Monthly Income x .36 = $1,350 allowed for housing expense plus recurring debt.

[edit] References

  1. ^ Analyzing Your Debt to Income Ratio. Home Buying / Selling. About.com.
  2. ^ Obringer, Lee Ann. Qualifying for a Loan: Debt-to-Income Ratio. How mortgages work. HowStuffWorks.
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