Your debt-to-income ratio is one way that lenders measure your ability to manage the monthly payments you’ll need to make to repay the money they intend to lend you. Let’s take a look at how this ratio is calculated.
Your monthly debt is the amount you pay each month for recurring payments on things like your mortgage payment, auto loans, student loans and the minimum payments due on your credit cards.
Your monthly income is the gross amount of money you earn before you pay taxes and before other deductions are taken out.
To calculate your debt-to-income ratio, simply add up all of your recurring monthly debt payments and divide them by your gross monthly income.
As you might expect, lenders like this ratio to be as low as possible. In general, you’ll want to keep the number below 36%, but the highest ratio a borrower can typically have to still get a qualified mortgage is 43%… with some exceptions.
In short, this ratio is used by lenders to help determine whether the borrower will have a good ability to repay the loan.