Your debt to income ratio is the percentage of your monthly gross income that generally goes toward the debt that you owe.  Your debt to income ratio or DTI is often used by creditors to determine if you’re eligible for a loan or not.  If this rate is too high, you may find that you’re not going to be able to get the mortgage or loan that you were applying for.

When it comes down to figuring out your DTI, it’s actually a rather simple formula.  Let’s take a look at the formula below to give you a better idea on how the process works.

• Let’s say that you make $48,000 a year.  We will want to divide this by the 12 months in the year.  You’re going to get 4,000/month.
• Now, let’s say you have $1,000 in monthly debts.  You’ll want to take the $4,000 and divide it by $1,000.  This will give you a 25% debt to income ratio. 

What’s a good ratio you might ask?  Well, you want to be as close to 0 as possible, but most experts will tell you that you won’t want to be any higher than 25-30%.

How does your DTI work with a mortgage?

When it comes to applying for a mortgage, the banks generally follow a formula that allows them to see how much you can afford when it comes to a payment for your house.  Let’s take the above example we just used.

With your 4,000 month average, the banks are going to muliply this number by 28%, because your home payment should usually be about 30% of your take home pay. 

Your $4,000 multiplied by .28 will give you $1120.  Your payment for your home will most likely have to be under $1120 to get approved.  Don’t forget that you have to add home insurance, and taxes.

This formula isn’t exact for many banks, because a lot of them vary.  It will give you a better idea on the other hand to know how much you can afford when to look for a home.  I would advise that you get pre-qualified just before you get ready to look at houses.

Your debt to income ratio isn’t hard to figure out at all.  Take these formulas into consideration when figuring it out, because it’s not that hard.  Once you know where you stand, this will give you a better understanding at what creditors look at.