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.

  1. Can I borrow from my annuity to put a down payment on a house?

    You can borrow from your annuity to put a down payment on a house, but be prepared to pay an assortment of fees and penalties. ... Read Full Answer >>
  2. Can I take my 401(k) to buy a house?

    Once you reach 59.5, you can use the funds in your 401(k) retirement savings account to buy a house or any other expense ... Read Full Answer >>
  3. Can I take my 401(k) to buy a house for my children?

    Under the standard regulations for 401(k) retirement savings plans, you may elect to withdraw funds from your 401(k) for ... Read Full Answer >>
  4. How is market value determined in the real estate market?

    Anyone who has ever tried to purchase or sell a home has probably heard a lot about the property's fair market value, or ... Read Full Answer >>
  5. What is the difference between adjusted and regular funds from operations?

    While regular funds from operations measures the cash flow generated by the operations of a real estate investment trust ... Read Full Answer >>
  6. What are examples of typical leasehold improvements?

    Typical leasehold improvements include partitioning a large, open space into smaller, more structured areas such as dressing ... Read Full Answer >>
Related Articles
  1. Budgeting

    How Much Debt Can You Handle?

    Follow these five steps to manage debt without cutting up your credit cards.
  2. Credit & Loans

    Debt Consolidation: When It Helps, When It Doesn't

    Here's the smart way to use a debt consolidation to get your financial life back on track
  3. Credit & Loans

    How To Keep Debt Low

    Here's a breakdown of how you can stay out of debt or keep your debt low.
  4. Investing

    Why a Rise In the National Debt Is Good for You

    In the first quarter of the year, the household national debt for Americans was $129 billion. Yet contrary to popular belief, debt is not always a bad thing.
  5. Budgeting

    Good Debt Vs. Bad Debt

    Is there really such a thing as good debt and bad debt? Read on to find out.
  6. Home & Auto

    6 Neighborhood Red Flags

    There are some qualities you can’t discover about a neighborhood until after you’ve moved in. But there are ways to scout out red flags ahead of time.
  7. Professionals

    Illiquid Real Estate: Correlation Pros and Cons

    Stock and bond markets are moving more closely in tandem with each other. Is illiquid real estate the vaccine for this correlation?
  8. Retirement

    5 Ways to Use Your Home to Retire

    Retirement is going to cost a lot, and for homeowners who face a shortfall, their home can be a source of income. From downsizing to renting, here's how.
  9. Home & Auto

    5 Luxurious Ways to Boost Your Home's Resale Value

    Not all renovations are created equal. Here are five that are most likely to make a property appreciate (and be appreciated by househunters).
  10. Personal Finance

    Choosing An In-Home Safe: Features To Look For

    What to look for in a box to protect your irreplaceable belongings.
  1. Private Equity Real Estate

    A Definition of "Private Equity Real Estate" and how it applies ...
  2. Encumbrance

    A claim against a property by a party that is not the owner. ...
  3. Equity

    Equity is the value of an asset less the value of all liabilities ...
  4. Proprietary Reverse Mortgage

    A loan that lets senior homeowners retrieve the equity in their ...
  5. Single-Purpose Reverse Mortgage

    A financial tool that lets senior homeowners retrieve some of ...
  6. Chattel Mortgage Non-Filing Insurance

    An insurance policy covering losses that result from a policyholder ...

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!