How To Calculate Debt To Income Ratio
by Tom from Mandeville, LA USA
Ask Kate: How To Calculate My Debt To Income Ratio - Kate, Can I get a better interest rate? We have owned our home seven years. We have a 30 yr fixed mortgage at 7.75 percent with a $250,000 mortgage balance. We owe about $60,000 in credit cards and cars, our salary is $167,000 and credit is pretty good.
Kate Answers: How to Calculate Your Debt to Income Ratio
Hi Tom, Qualifying for a mortgage is like assembling a puzzle.
First the corner pieces...
- Total Income
- Assets including property value
- Credit History
The stronger the corners, the lower the interest rate.
But can you think of another piece to the puzzle? How about the debt ratio? To complete the puzzle, let's learn how to calculate a debt to income ratio...
- Determine monthly income before deductions. Example: $5,000
- Estimate a house payment including property taxes and insurance (PITI). Example: $1700
- Tally any long term debt. Example: $600
Follow along with me to calculate two debt ratios using these figures.
$1700/$5000 = 34% housing to debt ratio (average)
($1700+$600)/$5000 = 46% total debt ratio (high)
Rule of thumb, look for debt ratios around 30% and 40%, depending on the loan program and compensating factors.
How To Calculate A Debt To Income Ratio - My Client's Story
Don't count yourself out of the game if your debt ratios appear high.
Listen to this story about my homeowner who was selling his house to buy a larger one...
Once I prepared open house flyers for a client who was selling his home. I included mortgage qualification info for prospective home buyers.
But the debt ratio calculations alarmed my seller to the extent that he worried a bank wouldn't loan him enough money to buy another house.
I explained that lending is more of an art than a science and he was observing guidelines, not rules. Sure enough, he went on to sell his house and comfortably obtain his next mortgage.
Choosing A Reliable Lender To Get Your Best Mortgage Rate
Keep in mind, there is more than one way to calculate your total debt ratio. Just as a physician who treats himself has a fool for a doctor, I'd like to remind you that debt ratio calculations are guidelines, not rules.
For reliable answers, your individual circumstances and compensating factors should be evaluated by a dependable lender who understands how to calculate a debt to income ratio.
Want to see what others are asking? Years in the making, go to Refinancing Answers by Kate
and save it to your favorites so you can easily return in the future.
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