Residential Realty Northwest
Residential Realty Northwest
Mary G Johnson, Residential Realty NorthwestPhone: (503) 313-0688
Email: [email protected]

Understanding Debt to Income Ratios and Why They Matter

by Mary G Johnson 05/24/2020

Image by Mimzy from Pixabay

As you start your journey to home ownership, one of the terms you may hear from your mortgage lender is debt to income ratio. Many people have never heard this term before, but it is an important aspect of obtaining a mortgage. Your mortgage lender wants to make sure you are not going to default on your mortgage payments. While your current credit history plays a role in this determination, your debt to income ratio also is considered.

Your debt to income ratio is the percentage of your gross income against the amount you are obligated to pay monthly. This means your credit card bills, car loans, life, health, and other insurance premiums may be considered, along with your anticipated mortgage payment and taxes. Generally, a lender will want your debt to income ratio to be at or lower than 43 percent of your income.

Calculate Your Ratio Early in the Process

Potential homebuyers can easily determine what their debt to income ratio is based on current mortgage interest rates and the amount they are seeking to borrow to purchase a home. To calculate the ratio, you will need the following information:

  • Total annual salary — since a lender will review your taxes for the past three years, the best method is to use your most recent tax return and get your gross annual income before taxes. Once you have this number, divide it by 12 for calculating your gross monthly income.
  • Monthly debt ratio — you will want to determine what debts you are obligated to pay monthly. This should include student loans, car payments, and any other debt which you expect to pay for at least five years including personal loans. Using a mortgage calculator, determine what you anticipate your mortgage payment will be including property taxes and insurance. Make sure you include all costs associated with your mortgage when using a mortgage calculator. The totals you get here will generate the total amount of your monthly debts.
  • Final calculation — the final calculation will be determining your debt to income ratio. This is your total monthly debt divided by your gross monthly income is equal to your debt to income ratio.

High debt to income ratios can impact your ability to secure a mortgage. However, an important thing to remember is that some lenders do have some flexibility when using debt to income ratios. There are lenders who are exempt from the “ability to repay” rules for qualified mortgages. Talk to your mortgage lender about your debt to income ratio if the numbers are problematic. They can provide you with the available mortgage options based on your ratio.

About the Author
Author

Mary G Johnson

"As a full-time realtor, along with my team at Residential Realty NW, I bring a full range of knowledge and experience, so that I can be both a trusted resource for both buyers and sellers of Portland properties. My professional success comes from my belief in working hard, being consistent with follow-through, knowledge and excitement about the industry, and building a strong honest relationship with the clients I represent. My skills in the art of marketing, vision, and negotiations will guide us through every transaction".

Sincerely,

Mary G Johnson   

Experience: 

Residential Real Estate Broker, SRES, PMAR Master's Circle, licensed in Oregon & Washington  

In-home Design Consultant, Calico Corners, Portland, OR

Merchandise Floor Design/Stage, Wight's Home and Garden, Seattle, WA  

Owner MGJ Media/Advertising, Boise, ID  

Professional Associations:

National Association of Realtors

Portland Metro Association of Realtors Masters Circle

Member Senior Real Estate Specialist

Regional Multiple Listing Services

Oregon Association of Realtors

5 Star Professional Award