How to Calculate Your Debt-to-Income Ratio (DTI)

calculating dti ration
Moshe Farber
11, Mar 2022

While nobody likes the “D-word,” it’s important to remember that a loan of any kind is a form of debt. That’s why, before selecting a mortgage, you must determine a realistic figure that you can responsibly borrow without the risk of defaulting on your loan. Additionally, when applying for a home loan, the lender must be assured you will be able to pay it back. Calculating your Debt-to-Income ratio (DTI), will help you to assess an amount based on your budget that you can safely borrow, and over what period of time you can be expected to pay it back, in order to find a mortgage that is a fit for you and your family. Additionally, calculating your DTI will also help you determine your own loan eligibility and rule out loans that are not suited to your budget and lifestyle.

Need help calculating your Debt-to-Income Ratio? A mortgage advisor can help you calculate your DTI and make the loan application process smooth, quick, and easy. Reach out to an Astar loan officer today! Email info@astarteam.com or call 888-ASTAR-11 (888-278-2711) to start the loan application process.

After analyzing current debt, financial engagements, and income, your DTI gives you a clear idea of the figure that the borrower can afford to repay. Applying for credit can be an excellent option for individuals whose financial health qualifies to bear the loan, and knowing the debt-to-income ratio assists while evaluating that status.

After analyzing current debt, financial engagements, and income, your DTI gives you a clear idea of the figure that the borrower can afford to repay. Applying for credit can be an excellent option for individuals whose financial health qualifies to bear the loan, and knowing the debt-to-income ratio assists while evaluating that status.

Click here for a free Debt-to-Income Calculator

Credit scores are the most common factor we have all heard of while talking about debt and eligibility. However, along with credit scores, a debt-to-income ratio constitutes a vital part of one’s overall financial report card. It is a primary factor that decides whether or not you qualify for the loan since it is directly associated with the lender’s risk while they offer you a loan. 

Calculating the DTI is also beneficial for the borrower as it helps determine their limitations on their loan eligibility. After analyzing current debt, financial engagements, and income, your DTI gives you a clear idea of the figure that the borrower can afford to repay. Applying for credit can be an excellent option for individuals whose financial health qualifies to bear the loan, and knowing the debt-to-income ratio assists while evaluating that status.

Borrower’s Capacity 

A borrower’s capacity pertains to the ability of the borrower to repay their loan. The lender must know about the borrower’s financial strength to ensure that they can repay in a regulated manner. 

To find the borrower’s capacity, the underwriter considers numerous factors, such as annual income, outstanding debt, and current employment. They also review additional assets like stocks, bonds, savings, IRA accounts, and checking accounts. The cash reserves of the borrower are also analyzed. 

The repayment habits of the borrower, like their bill payments, expense practices, prospective financial backing, and cash reserves, are notable factors that contribute to the borrower’s capacity. Lenders consider two ratios to determine the borrower’s ability – The Housing Ratio and the Debt Ratio. 

Housing Ratio – The Front End Ratio

The housing ratio is also called the front-end ratio. The percentage of the proposed mortgage payment, including principal, interest, real estate taxes, and mortgage insurance, is divided by the monthly income. This percentage is indicative of the front-end ratios’ conjunction with the back-end ratio.

Debt Ratio – The Back-End Ratio  

The debt ratio, also known as the back-end ratio, is the second component determining the borrower’s capacity. It takes the mortgage payment calculation from the housing ratio and consolidates it with the existing payment obligations of the borrower. These commitments are visible on the borrower’s credit report. There are certain instances where loans pass for a high number, but ideally, the debt ratio should not exceed 40%.

Calculating the Debt Ratio

Calculating the debt ratio is an essential step in preparing your loan applications. It allows the borrower to sketch a boundary around their financial limitations and apply for a possible amount in terms of periodic installments and the overall repayment. 

Given below are the steps you can follow to calculate the debt ratio:

Step 1 – Estimate your Monthly Expenditure

The first step is to form a detailed list of your monthly bills and calculate the total amount of your monthly expenditure. 

These bills and payments can include your house rent, child support payments or monthly alimony, student loans, auto loan, credit card payments, and other withstanding financial engagements. Your general expenses like gas, utilities, and food are not included in this list. 

Step 2 – Divide 

Include all primary and secondary income sources to determine your gross monthly revenue. This amount will be your income before taxes. Now that you have your monthly expense and income amount, you must divide the costs with your income.

The final figure is your debt-to-income ratio which will be a percentage figure. A lower DTI suggests a higher capacity and casts you as a less-risky borrower. 

After calculating your DTI ratio, it is crucial to understand what the different percentages mean. Lenders review each percentage range in an application with a different perspective, and it directly affects your possibilities of availing credit. 

The standard guidelines for DTI ratio are:

DTI 35% or Less

When your DTI is 35% or less, it reflects a good financial condition. It implies you are at a manageable level of leverage based on your income. You have enough financial capacity to save or spend after paying bills and debts. Individuals with lower DTIs are viewed as favorable candidates by the lenders. 

DTI 36% to 49%

When your DTI is between 36% and 49%, you step slightly outside the favorable zone. You still possess the potential to improve. It implies you are managing your financial commitments, but you are also working to lower your DTI. With a lower DTI, you land yourself in a better position to handle unexpected and emergency costs. 

Lowering your DTI ratio can be a challenging process, but some of the best steps often include cutting expenses, refinancing debt to lower interest rates, and adjusting your investment portfolio. Speaking to a financial advisor can also help to balance your monthly budget. Negotiating an increased income can also help to improve your DTI ratio dramatically.

DTI 50% or more

When your DTI is 50% or more than that, it means that your financial conditions are constrained to save or spend. It indicates that over half of your revenue is transferred to debt payments, and you are not left with enough to bear the cost of unforeseen circumstances. Your portfolio might not be ideal for the lenders, and with a high DTI, your credit options will get limited. 

Every loan application is different, and each applicant has diverse revenue and expenditure scenarios. In many cases, the overall income might be affected over time due to commissions, investment returns, job promotions, demotions, and similar factors. While calculating your DTI might seem like a simple process, it is always advisable to consult an expert mortgage advisor who can assist with additional eligibility instructions, market information, and accurate calculations. 

Need a mortgage advisor who can help you calculate your DTI and make the loan application process smooth, quick, and easy? 
Reach out to an Astar loan officer today! Email info@astarteam.com or call 888-ASTAR-11 (888-278-2711) to start the loan application process.

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