A debttoincome ratio is a personal finance measure that compares the amount of debt you have to your overall income. Lenders, including mortgage lenders, use the debttoincome 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 debttoincome 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 debttoincome 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 debttoincome 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 debttoincome ratio. A low debttoincome ratio demonstrates a good balance between debt and income. Lenders prefer to see a debttoincome 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 mortgagerelated 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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