How to Figure Out Debt to Income Ratio Calculator?

Debt to Income Ratio CalculatorThe debt-to-income ratio for a mortgage is a financial metric that measures a borrower's monthly debt payments relative to their gross monthly income. Lenders use this ratio to assess an individual's ability to manage additional debt, such as a mortgage payment.

It is calculated by dividing the total monthly debt payments (including the proposed mortgage payment) by the borrower's gross monthly income. A lower debt-to-income ratio is generally favorable, indicating that a borrower has more income available to cover housing costs and other debts.
Lenders often have specific maximum allowable debt-to-income ratios when evaluating mortgage applications.

     
Front End Ratio  
Debt Ratio  
 
Incomes (Gross)
Monthly Income  
Monthly Pension & Social Security  
*Monthly Investment & Savings  
*Other Income  
TOTAL MONTHLY INCOME  
Debts / Expenses
Rent Payment    
New Mortgage Payment  
Property Tax (included above)    
HOA Fees (included above)    
Homeowner Insurance (included above)    
Monthly Credit Cards (minimum payment)  
Monthly Student Loan  
Monthly Auto Loan  
*Other Loans and Liabilities  
TOTAL MONTHLY DEBT  

*Investment & Savings - capital gain, dividend, interest, rental income

*Other Income - gift, alimony, child support

*Other Loans and Liabilities - personal loan, child support. alimony, etc.

Debt to Income Ratio Explanation

The amount of money you can borrow depends on your credit score, loan program, and the monthly debt you pay each month. The debt-to-income ratio is a simple formula that compares how much monthly income you earn against your monthly obligations.

There are two calculations: the payment calculation and the debt calculation. The payment calculation is the maximum mortgage payment if the applicant has little or no monthly debt.

The payment calculation includes principal and interest, 1/12 of the real estate taxes, 1/12 of the homeowner's insurance premium, private mortgage insurance (or MIP), and any other required monthly obligations (i.e., homeowner's association fee, etc.).

The back-end ratio calculation is the maximum amount of monthly debt, including the proposed mortgage payment that the applicant can carry for the loan program.

Here's the calculation:

Debt to Income Ratio Calculation
Gross monthly income $6,000
Monthly Payments: front-end ratio back-end ratio
Proposed Mortgage payment $800.00 $800.00
Car payment - 0 - $250.00
Minimum credit card payments - 0 - $200.00
School loans - 0 - $1,000.00
Installment loan - 0 - $50.00
TOTAL $800.00 $2,300
Debt to income calculation $800 / $6,000 $2,300 / $6,000
Debt ratio 13.33% 38.33%

Debt to Income Ratio for an FHA Loan

The Federal Housing Administration uses the applicant's credit score to determine the debt ratio percentage for the monthly payment and monthly debt. For 580 and more significant credit scores, the "ideal" price is 31% of the applicant's monthly income and 43% for the monthly debt and proposed mortgage payment. As you can see from the chart below, the FHA will allow a debt ratio as high as 40% for the price and 50% for the debt ratio, with compensating factors.

Debt to Income Ratio for a VA Loan

The Veteran's Administration approaches the debt-to-income ratio differently from the FHA, USDA, and conventional loan lenders.

The VA only uses the back-end or debt ratio as the initial qualification for a VA home loan. The VA believes the "ideal" debt ratio should be 41%, which means that the monthly loan payment without any debt should not exceed 41%, or the proposed mortgage payment with monthly debt should be limited to 41% of the borrower's gross monthly income.

The Veteran's Administration requires one more calculation to determine the maximum loan amount; the calculation is called residual income. The VA believes that the veteran should have enough money at the end of the month to pay for food, utilities, child support, and other expenses. The residue income analysis is more important to the Veteran's Administration than the 41% debt ratio.

Debt to Income Ratio for a USDA Loan

The USDA usually follows the FHA underwriting (approval) guidelines. However, the USDA departs from the FHA regarding the debt-to-income ratio.

The USDA prefers a 29% payment percentage and a debt ratio of 41%, and the USDA will permit higher ratios with tight limits.

The Conventional Loan Debt to Income Ratio Limits

Conventional home loans are mortgages that meet the lending guidelines of the Federal National Mortgage Association (Fannie Mae) and the Federal Home-Loan Mortgage Corporation (Freddie Mac).

The federal government does not back conventional loans and does not require any upfront mortgage insurance. These loans need mortgage insurance when the purchase has a down payment of less than 20%, or if the loan is to refinance an existing mortgage, the equity must be at least 20% to avoid the private mortgage insurance cost.

The conventional debt to income limits the payment ratio to 31% and will permit the debt ratio to extend to 45% if the borrower meets the credit score and cash reserve requirements.

Determining Your Monthly Income

The lender uses different approaches to determine the applicant's monthly income. The most common way of deciding monthly payments is the year-to-date income calculation.

The YTD income calculator will estimate your monthly income, and the calculator can add up your monthly debt payments.

What Affects the Debt to Income the Most?

Without a doubt, your credit score has the most significant influence on your debt-to-income ratio. Lenders use credit scores to calculate your interest rate.
That may not seem fair, especially if your credit score has suffered due to a divorce or an unethical creditor, but this is our world. A higher interest rate implies a larger monthly mortgage payment, and the private mortgage insurance premium (PMI) for traditional mortgages is also affected by credit score. PMI rises when the credit score falls.

The FHA or USDA does not use credit scores to determine monthly mortgage insurance costs, and the VA loan program has no private or monthly mortgage insurance fees.

How Can I Improve My Debt to Income Ratio?

The first step to improving your debt-to-income ratio is to raise your credit score. It might mean delaying your purchase or refinance, but strengthening your credit may be the right decision in the long run. Catching up on past-due bills, paying off collection accounts and judgments, and keeping your credit card balances at 50% or less than the credit limit can lift your credit score.

Another option is adding a co-signer. Co-signers work well with the FHA program. The FHA adds up your monthly income and debt and the co-signer(s) income and debt to calculate the debt-to-income ratio.

Co-signers are not as effective with conventional loans, and the VA only recognizes spouses for maximum eligibility. The USDA requires that the co-signer is an occupant of the home.

Consider Debt Consolidation

Debt consolidation may decrease your credit score for a short period, but by lowering your overall monthly obligations, you can boost your ratio.

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