Written by If you’re trying to determine whether or not you can qualify for a mortgage, one of the first factors for you to think about is your debt to income ratio (DTI). This is a % of your total “minimum” (we’ll discuss this further later) monthly debt divided by your “gross” monthly income.
When determining your DTI you will factor in your annual income and monthly payments including your current mortgage/rent payments, credit cards, car loans and other fixed expenses ie: student loans, alimony, child support, personal loans, investment property costs, etc.
Your Annual Income (and your co-borrower’s if applies) will be computed before taxes (Gross) and include your base salary, bonuses, commissions, overtime, tips, child support, alimony and income from investments and investment properties.
Payments include: Any mortgage or rent payments you are currently making. This does not include the new mortgage you are qualifying for. Credit card payments are added in based on what your minimum monthly payments are (you owe $3000 with a minimum monthly payment of $75. Your DTI factors in the $75 not the $3000. If you have a car loan or lease, your monthly payment will be added in. Then you will add in all the other monthly costs mentioned above. The total will be your Debt which will then be divided by your gross annual income
Sample computation:
Gross monthly income = $3000 Monthly Debt = $1000 (the figure you came up with by adding up all your monthly debts)
1000/3000 = 33% This is your DTI
Less than 36% is typically considered acceptable and workable toward qualifying for a mortgage. The lower this % the more you can borrow which in turn provides you with more options and negotiating power when searching for that dream home!
