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## DEBT TO INCOME RATIO

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Unless your last name is Trump or you were recently the last “Survivor” in Somoa, you’ll probably need a mortgage to purchase a home. Not many folks can afford to pay cash for a more than \$100,000 purchase. But to get a mortgage, you have to prove that you can actually pay it off. And that means your lender will be looking at something called DTI or debt to income ratio.

Fortunately, this little calculation is pretty darned simple. Let’s see if you can figure it out on your own with these questions:

3. What is a ratio?

Of course, there are many ways to describe your debt (housing, housing + other debts) and many ways to describe your income (gross yearly, take-home monthly). But ratio? That’s simple.

A ratio is a way to compare two numbers, either by using a colon or a fraction. In this case, we’re looking for a number, so we’ll write the debt to income ratio as a fraction and then divide. But how do you know which is the numerator and which is the denominator?

Turns out that’s pretty simple, too. Look at the order: debt comes first, so it will be in the numerator; income comes second, so it will be the denominator. If you think of “to” as the fraction bar (or as division), this makes sense.

debt to income =

[pmath size=12]debt/income[/pmath]

You can’t get much easier than division, especially if you can use a calculator. But in order to divide, you need to define your variables. In other words, you need to know what “debt” means and what “income” means.

In this situation, income is your monthly gross income. If you get a weekly paycheck, you’ll have to multiply that amount by four. If you paid twice each month, multiply by two. And if you get paid once each month, you don’t have to do a thing.

The debt can be calculated one of two ways. Some lenders only want to know what your expected housing debt is. This amount will include your monthly mortgage payment, insurance and taxes But these days, lenders are looking at your entire debt, which also includes monthly payments for child support, student loans, car loans  and minimum credit card payments — plus your expected housing debt. (You don’t need to include regular monthly bills like energy and childcare costs.)

Let’s say your monthly gross income is \$3,027. You’ve figured out that you can afford an \$890-per-month housing payment (to include mortgage, insurance and taxes). In addition, you have the following regular monthly debts: minimum monthly credit card payments (\$35), student loan payments (\$150) and car payment (\$300). What is your debt-to-income ratio?

Method One: Simply divide your expected monthly housing expenses by your monthly gross income.

890 ÷ 3027 = 0.29

So using the first method, your debt-to-income ratio is 29%.