What is debt-to-income ratio? This equation, comparing how much money you owe to the money you make, affects whether you can qualify for a mortgage—but let’s unpack this important term into plain old dollars and sense.
You know what debt and income each mean independently. Debt is money you owe to another party. As a consumer, your debt load is what you owe in obligations like credit card payments, student loans, car loans, installment loans, car loans, personal debts, alimony, or child support. Meanwhile, income is the sum of the money you make from your job, part-time work, alimony, or income-producing assets such as real estate or stocks.
So, what do debt and income have to do with obtaining a home loan?
What is debt-to-income ratio?
Your debt-to-income (DTI) ratio helps lenders figure out how (or whether) a home purchase can fit into your financial picture. To calculate your DTI ratio, you simply divide your ongoing monthly debt payments by your monthly income.
For revolving debt like a credit card, use the minimum monthly payment for this calculation. This might not match what you typically pay each month—hopefully, you’re paying off your credit cards as quickly as possible, in order to reduce how much money you pay in interest—but the minimum payment is what most lenders use when calculating DTI.
For installment debt, which is money you owe in fixed payments for a fixed number of months—such as installments you owe on the washer/dryer or A/C unit you purchased—use the current monthly payment.
So, let’s say you’re paying $500 to debts and pulling in $6,000 in gross…