When a lender calculates how much of your total income will be spent paying off monthly debts, the final calculation is called a debt-to-income ratio. This ratio can affect your loan’s terms and interest rate, so it’s important to keep it as low as possible. Here’s how you can calculate your debt-to-income ratio.
1. Front-end debt-to-income ratio
Your front-end debt-to-income ratio calculates how much of your monthly income will be spent on monthly housing costs.
To get your front-end ratio, add up:
- Monthly mortgage payment (interest + principal)
- Monthly property taxes and insurance
Now divide that number by your monthly income before taxes. While every loan and lender is different, most mortgage loan officers look for a front-end ratio between 28 to 33 percent when reviewing a mortgage application.
2. Back-end debt-to-income ratio
Next, lenders will assess your total debt, including that which isn’t related to housing. This calculation is called your back-end ratio.
To get your back-end ratio, add up monthly debt, including:
- All housing costs: Monthly mortgage principal and interest, taxes and insurance
- Car loans
- Credit card payments
- Student loans
- Child support
Then, divide that number by your monthly income — again, before taxes — to get your back-end debt-to-income ratio. While loan applications vary, mortgage experts typically recommend a back-end ratio of between 36 to 42 percent.
What if my debt-to-income ratios are too high?
For most people, reducing their debt is easier than increasing their income substantially. To reduce debt, start by reviewing your monthly spending to see if you can minimize or remove non-necessities, including:
- Dining out
- Fast food, including coffee shops
- Entertainment, including cable subscriptions or online streaming services
- Vacations or trips
Plus, avoid taking on more debt. Use your credit card only when you can pay it off immediately, and continue to drive your car after you’ve paid it off. Whether your new monthly savings is $20 or $200, put it towards paying down your overall debt. Slowly but surely, you can lower your debt-to-income ratio.
Need help getting started?
Ready to review your debt-to-income ratio, or hope to apply for a mortgage now? We can help. Reach out today to get in touch with a home buying expert in your area.
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