How does the debt-to-income ratio work?

     The debt-to-income ratio indicates how high your debt is when compared to your income. The higher the ratio, the higher the credit risk. The ratio is calculated by dividing your total monthly debt payments into your monthly gross income.

Example:

Total debt payments = $600

Total monthly income = $3000

Debt to income ratio = 20% (600 / 3000)

     Acceptable debt-to-income ratios vary depending on several factors such as: type of loan you are seeking, past credit history, current credit score, and the amount and type of existing debt. This ratio is a guideline to help determine if your current income is sufficient in view of the loan you would like to obtain, first, for housing expenses (including payment, taxes, insurance and fees) and, second, for recurring debt along with housing expenses.

     The typical qualifying ratio for a conventional loan is 28/36, FHA loand usually habr a higher qualifying ratio of 29/41.  Depending on your individual circumstances, it is often possible to be approved with a higher ratio. A higher ratio allows for more of your gross monthly income to be applied to each debt category.

For Example: