(414) 810-4569 jbucio@waterstonemortgage.com Joshua Bucio, NMLS #286333

# How To Calculate Debt To Income Ratio

One of the largest parts of a mortgage pre-approval is calculating the debt to income ratio.  This part helps the home buyer understand what their maximum amount can be, when looking to buy a home.

The goal is to stay under 50%, since many programs will allow you to go up to 49% debt to income ratio.  This percentage is calculated by taking the total in monthly loan payments, divided over the total in gross monthly income.

### Here is an example of how the debt to income ratio is calculated:

First, figure out the total in annual gross income.  (before taxes)

Let’s say someone is paid an hourly rate of \$25/hour.  For this example, let’s assume this person works 40 hours a week.  Take \$25 x 40 hours  = \$1000, then \$1000 x 52 weeks in the year = \$52,000.  Then, take that annual amount of \$52,000 and divide by 12 = \$4333.33.  This will give us the monthly gross income.

Second, figure out the total in minimum monthly loan payments you currently have, plus the new mortgage payment.

Auto payment = \$350

Credit card payment = \$50

Personal loan payment \$100

Total = \$500

Plus, the new mortgage payment.  Let’s assume a \$200,000 loan amount at a rate of 5% for a 30 year loan.

Principal and interest = \$1073.64

Property Taxes = \$325

Homeowners Insurance = \$60

MI (mortgage insurance, if less than 20% down) = \$100

Total = \$1558.64

Grand total = \$500 + \$1558.64 = \$2058.64

Divide the \$2058.64 (total in monthly payments) over \$4333.33 (total in gross monthly income) = 47.507%

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That example shows the percentage under 50%, which will help in having a few mortgage options available.

By understanding this calculation, you can also figure out how much more you may qualify for, if you paid off a current loan you have.  This will allow you to increase the new mortgage payment, with less current loan payments.