How to Calculate Your Debt-to-Income Ratio

Applying for a loan can be stressful and even frightening. Whether you’re applying for a credit card, auto loan or mortgage loan, being aware of the key items that underwriters will look at can ease your worries and fears greatly. Besides understanding how underwriters look at you and calculate your debt-to-income ratio (DTI), it’s also important that you take a look at your financial situation to feel comfortable, as well.

The role of an underwriter is to determine whether you qualify for a loan. So, the most important question underwriters ask is: Can you afford to make the payments on this loan combined with all your other obligations?

You will hear the term DTI often as a key measurement here. In a nutshell, the underwriter will look at your total income (gross income before taxes) and then the total amount of payments you make on all your current debt. He or she will look at the payments you have for your rent or mortgage, car, student loans, credit cards, etc. In general, underwriters like to see this ratio no higher than 45 percent. In other words, for every $1,000 of income you have, you should have no more than $450 in loan and debt payments.

While underwriters look at DTI, you need to look at the reality of all your obligations and expenses that you pay. The most important question you should ask is: With this new loan, will you still have enough money to live the way you want to?

The DTI that underwriters use doesn’t include items like insurance, groceries, cell phone bills, retirement savings and more. For many people, these expenses add up quickly and are a major portion of their budget. Prepare a list of these items, and then add on the amount of the new loan payment. How comfortable are you with what you have left?

Have questions about your DTI and how much you might be able to afford? Our financial solutions guides can help answer your questions and work with you to find financial solutions that meet your needs.

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