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Whenever you apply for a mortgage loan, your lender calculates your debt-to-income ratio in order to check your affordability to repay. Debt-to-income ratio is the percentage of your monthly gross income that you pay towards your debts. It is also referred as debt income ratio or simply DTI.

How to calculate DTI

Debt income calculation is very easy and you can do it yourself. You need to divide your total monthly debt by the total gross income you earn every month.

Types of DTI calculation

You can calculate debt-to-income ratio in 2 ways, which are described below.

1. Front end ratio ? The percent of your income that you utilize in paying your housing costs. It comprises of loan principal, private mortgage insurance, mortgage interest rates, property taxes, hazard insurance, etc.

2. Back end ratio ? The percentage of your monthly income that goes towards paying your recurring debts (such as, credit card payments, car loan payments, etc.). It also includes your monthly housing expenses.

Meaning of 28/36 debt income ratio

There is a 28/36 rule with the help of which, the lenders assess your affordability to pay off a mortgage. The numbers 28 and 36 are considered to be the ideal front end ratio and back end ratio respectively. If your front end ratio is less than 28% and your back end ratio is less than 36%, then it?ll be easier for you to take out a home loan.

How debt income ratio influences mortgage payments

You can take out mortgage loan with low interest rates if your debt income ratio is low. On the other hand, taking out home loans will be difficult for you if your debt-to-income ratio is high.

Do not worry if your debt income ratio is high. You can lower your debt-to-income ratio by preparing a budget and cutting down your monthly expenses.

This entry was posted on Wednesday, October 21st, 2009 at 6:42 pm and is filed under Other. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.