How to Determine Your Debt-to-Income Ratio

Lenders consider a number of factors when deciding the size of loan amounts, including credit history, income stability and employment stability. Basically, it boils down to your ability to repay a mortgage obligation.

The ratio is the percentage of your monthly income that is used to pay your monthly debts. Debts are broken down into two calculations, a front-end ratio for monthly housing expense and a back-end ratio for monthly housing and consumer expense. They are displayed in the following format: 28/36, which is the Fannie Mae guideline. However, lenders may make exceptions due to compensating factors like the amount of savings and the down payment. In fact, a majority of loans, from some lenders, go to 45 percent on the back-end.

How do you calculate your debt-to-income ratio? First, determine your gross monthly income, that's before taxes and deductions. This may include salary, self-employment income (if your income fluctuates month to month, it will be averaged over a two-year period), 75% of rental income (reduced for consideration of periodic vacancies), dividends and royalties (both require two years of federal tax return with all schedules attached), Income from

alimony and child support (require an award letter from the state) and retirement benefits.

Now, determine your housing costs, including principal, interest, taxes, insurance and if applicable, mortgage insurance and homeowners association fees. Next determine your monthly consumer debt. This includes car payments, credit card debt, installment loans, and similar expenses.

Example: If you make $5,000 a month, with monthly housing costs of $1,400 and monthly consumer debt of $400 then your ratio is 28/36