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.

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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