What is Debt- to-Income & How to Calculate It?

Debt-to-income is simply a calculation of the two factors mentioned: debt and income. Your debt is the total monthly debt payment across all lines of credit and accounts. Your income is the gross monthly income from all sources. Credit Unions, bankers, lenders, and brokers use the ratio of how much you spend each month to how much you make each month to figure out your financial standing and the probability of repayment on all debts.

The mathematical formula for debt-to-income ratios is relatively simple to follow.

Here’s how:

 All your monthly debts / gross monthly income x 100 

This calculation will result in a percentage indicating how much of your gross monthly income goes towards your debts and, ultimately, your ability to make your mortgage payments.

One common rule in the mortgage industry is the 43% ability to repay rule. This rule means that a borrower should strive for a maximum of 43% DTI ratio for a qualified mortgage. Of course, there are exceptions, be sure to consult with your Credit Union, banker, lender, or broker for more information. 

If you do not find yourself meeting the necessary ratio to purchase your home, do not fret. Although increasing one’s income is not doable overnight, here are a few suggestions that could help lower your debt.

• Hold off on taking on additional debt.
• Set a monthly goal for your DTI and revisit it.
• Use some of your extra income towards cleaning off outstanding debt. 
• Negotiate your interest rate so you can pay off your debt faster.

When Credit Unions, bankers, lenders, and brokers analyze your DTI through LendingPad, they will collect your income information and order a credit report to review your outstanding debt. LendingPad will automatically calculate this and give them a quick snippet of your DTI ratio. Making this readily available and accessible will help your lender analyze your ability to repay at a glance.