To qualify for a mortgage, every applicant must have their debt-to-income ratio calculated. This measure is a comparison tool used by lenders to assess the amount of income an applicant has versus the amount of financial obligations they must meet. If you plan to apply for a mortgage anytime soon, it's best to familiarize yourself with the measure.

Calculation Guidelines

The practice for calculating a debt-to-income ratio is fairly simple. First, add all the income you receive monthly. Next, add the total amount of all your monthly debts, and divide this total by your total income to determine your ratio. For example, a person who earns $4,600 a month and has monthly debt totaling $1,380, would have a 30% ratio. 

The exact guidelines vary amongst mortgage lenders, but a good rule of thumb is to keep your ratio in the lower thirties, or lower. However, for VA Loans and some federally assisted buying programs, applicants can qualify for a mortgage with a higher ratio.

Why It's Important

Lenders care about debt-to-income ratios because it offers a snapshot of just how well the applicant will be able to manage the new mortgage debt. If the current debt load of the applicant is close to their income level, and a mortgage would only add to their expenses, the mortgage company would find the applicant a high-risk borrower. 

High-risk borrowers are less likely to be approved. The larger the gap between your income and your debts, the lower your risks will be. However, the most important element is that calculating this ratio helps the borrower determine how much they can comfortably afford to borrow so that their homeownership experience is as enjoyable as possible. 

Income and Debts Included

There are some special parameters to keep in mind when it comes to income and debts that are included. In terms of income, the amount used for the calculation is the gross amount, not the net amount you see reflected on your paycheck. Next, only steady sources of income can be included, which includes payments you have consistently received over a duration of time. 

Additionally, not all debts are calculated. Many basic needs expenses, such as utility payments or health insurance premiums, are not typically included in the calculation. If there is any debt that you will no longer have by the time you're in the home, such as a vehicle you are about to pay off, the mortgage lender will also not likely include the expense in the calculation. 

Remember, not all mortgage lenders have the same debt-to-income standards. Speak directly with your mortgage lender to learn more about their specific requirements.