Revealing Your Debt-to-Income Ratio
Some mortgage applicants worry when they hear about the debt-to-income
ratio. Especially if you have some debt or poor credit, this term
may sound alarming. It is much better to think of this ratio as
an estimate of how much money you have available to pay for your
Your mortgage company needs this number to help you choose the
best loan option. Do not think of this as a test or a way to filter
you out of the “mortgage pool”. It helps you as much
as it helps the lender, because you do not want a loan that you
Sometimes you will see traditional loan debt limits called 28/36
qualifying ratios. The 28 and 36 are percentage numbers that translate
to two interpretations or calculations of your debt.
The 28 indicates the maximum percentage of your monthly gross
income that the mortgage company will allow you to use on housing
expenses. This includes the principal, interest insurance, property
taxes and homeowner’s association fees. Some lenders will
call this the PITI.
The 36 percent is the maximum percentage of your monthly gross
income that you can use towards housing expenses (in detail above)
as well as recurring or expected debt payments. Debt can be credit
card balances, child support or alimony, auto loans or college
An example of the debt-to-income ratio is as follows:
If your yearly gross income is $45,000 and you divide that by
twelve, you have a monthly income of $3,750. If you multiply the
$3,750 by 28 percent (.28) you get $1,050 for housing expenses.
This is your 28. Next, you multiply the $3,750 monthly income
by 36 percent (.36) and come up with $1,350 for housing expenses
plus debt. As you can see, the second calculation estimates how
much more money can be used towards debt as well as home finance
You should know that not all loans use this exact calculation.
FHA loans usually use 29/41 ratios to allow a higher amount of
debt. Also remember that the lender looks at this ratio as only
a small part of your loan application. You will not be rejected
solely on the basis of debt or poor credit, and the mortgage company
wants to meet your home owning needs.