A:

A debt-to-income ratio is a personal finance measure that compares the amount of debt you have to your overall income. Lenders, including mortgage lenders, use the debt-to-income ratio as a way to measure your ability to manage the payments you make each month and your ability to repay the money you have borrowed.

The debt-to-income ratio is calculated by dividing your total recurring monthly debt by your gross monthly income and is expressed as a percentage. For example, if you pay $1,000 for your mortgage, $500 for your car and $500 for the rest of your debt each month, your total recurring monthly debt would equal $2,000 ($1,000 + $500 + $500). If your gross monthly income is $6,000, your debt-to-income ratio would be $2,000 / $6,000 = 0.33, or 33%. If you had the same recurring monthly debt but your gross income was $8,000, your debt-to-income ratio would be $2,000/ $8,000 = 0.25, or 25%.

When you apply for a mortgage, the lender will consider your finances, including your credit history, monthly gross income and how much money you have for a down payment. To figure out how much you can afford for a house, the lender will look at your debt-to-income ratio. A low debt-to-income ratio demonstrates a good balance between debt and income. Lenders prefer to see a debt-to-income ratio smaller than 36%, with no more than 28% of that debt going towards servicing your mortgage. For example, assume your gross income is $4,000 per month. The maximum amount for monthly mortgage-related payments at 28% would be $1,120 ($4,000 X 0.28 = $1,120). Your lender will also look at your total debts, which should not exceed 36%, or in this case, $1,440 ($4,000 X 0.36 = $1,440). These are the figures your lender will look at to determine the size of the loan for which you can reasonably afford.

In most cases, 43% is the highest ratio you can have and still get a qualified mortgage. Above that, the lender will likely deny the loan application because your monthly expenses for housing and various debts are too high as compared to your income.


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