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What is the Debt to Income Ratio and How To Calculate It?

Reviewed by: David Naimey

Approved by: Chad Turner

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How Does My Annual Income Affect My Rate?

Your annual income will not affect the rate of your loan, but it will affect the amount the lender will be comfortable giving you. A mortgage lender will be more apprehensive lending out a loan that they determined would be difficult for the borrower to repay, when including their other debts and required monthly payments. A calculation that is used by lenders to determine income eligibility is the debt-to-income ratio. The Debt-to-income ratio is a guideline used by the lender to determine exactly what percentage of income to debts is acceptable.

For example, a borrower applies for a loan that results in a $1000 mortgage, but also has car payments for $250 and homeowner’s insurance payments for $150. Using this example, the amount of “debt” they owe per month is $1500. If the borrower has a monthly income of $4500, then the debt-to-income ratio would be 33% (Required monthly debt payments divided by monthly income, or $1500/$4500 = 1/3 or  33.33%). The magic number most lenders will look for is 43%, but depending on the lender, a loan may be approved to a borrower with a higher debt-to-income ratio if they have proven their ability to pay their debts on time.  So while a higher debt-to-income ratio may exclude certain high-risk borrowers from receiving the loan entirely, this will not increase or decrease the rate given for the loan.

In the next update, we will be discussing the different loan programs that are available and which program would be the best for you!

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