How to Determine Debt-to-Income Ratio

The debt-to-income ratio is a calculation lenders use to assess how much of your income is available after all your other debts are taken into account.

Two numbers
Many lenders prefer that your mortgage payment (including taxes and insurance) not exceed 28 percent of your gross monthly income (before taxes, insurance and retirement savings have been withheld) and that the total of your mortgage plus other recurring debt payments should not exceed 36 percent. This is called the 28/36 qualifying ratio.

The math

  • Annual Income = $50,000 divided by 12 months = $4,166.67
  • $4,166.67 x 28% (.28) = $1,166.67 (This is the 28 percent ratio allowed for housing expenses.)
  • $4,166.67 x 36% (.36) = $1,500 (The is the 36 percent ratio allowed for housing expenses plus other types of monthly recurring debt.)
  • $1,500 – $1,167 = $333 allowed for recurring debt

Recurring debt
Monthly recurring debt includes car payments, minimum credit card payments, installment loans like retail store financing and student loans, child support and alimony. It does not include spending for groceries, entertainment or utilities.

Loans with larger qualifying ratios
While most lenders prefer to see borrowers abide by the 28/36 debt-to-income ratio, some lenders offer loans with larger debt-to-income ratios. The federal government sponsors two mortgage programs with expanded ratios. The first is an FHA loan (which stands for Federal Housing Administration) which has a qualifying debt-to-income ratio of 29/41, which allows for a slightly higher housing expense, and much higher recurring debt load. (In the example above, this ratio would allow for a $1,208 housing expense and $500 for other debt.) The other government loan is for veterans (VA loan) and only has one qualifying ratio: the total amount of housing expense plus recurring debt should not exceed 41 percent.

A guideline, not a rule
It is important to remember that your debt-to-income ratio is a guideline, rather than a hard and fast rule. Lenders have a lot of flexibility – they look at the entire application and situation when making a decision about a loan approval.