How Do Lenders Calculate Debt-to-Income Ratio?

Here’s what you need to know about your debt-to-income ratio.

Today I want to talk about a pretty important topic: your debt-to-income ratio. If you don’t know, this is what lenders use to approve or deny loans. If you want to purchase a home in the future, this is crucial information. 

So how do lenders calculate your debt-to-income ratio? The first things they look at are your expenses. These include things like auto loans, student loans, personal loans, leases, etc. As a heads up, if your student loans are currently in deferment, we still have to calculate them into your expenses. We simply take 0.5 or 1% of the total balance and use that as your monthly expense. 

Once we add up all your expenses, we add in the cost of the home. This would include your new mortgage, taxes, homeowners insurance, and mortgage insurance (if required). 

After we add housing expenses with your other expenses, we divide this number by your total monthly income. Once we do this, we have your debt-to-income ratio. 

Depending on the loan program, you can go up to anywhere from 45% to around 55% of your debt-to-income ratio. This is determined by the automated underwriting system, which assesses the quality of the borrower. 

If you have any questions about this topic, please call or email me. I’d love to answer any questions you might have.