What is the Debt to Income Ratio and Why is it Important?

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If you’re thinking of buying a home with financing or getting any type of loan, you’re going to hear the term “debt to income ratio.” You are probably wondering what it is and why it’s important. Primary Residential Mortgage, Inc. is here to help. Learn more about debt to income ratio here, and when you are ready to take the next step and start the application process, give us a call.

What is Debt to Income Ratio?

Your debt-to-income ratio is all of your monthly debt payments divided by your gross monthly income. Most everyone has debts, and most people have some sort of monthly income. How much income and monthly payments you have is an important factor in figuring your credit score and the likelihood of your paying back a loan according to the terms of the agreement.

Why is the Debt to Income Ratio Important?

Your debt to income ratio is one way lenders measure your ability to make your payments every month to repay the money you have borrowed. If you have too much debt and not enough income, it will become increasingly more difficult for you to make your payments on time.

How is Calculated?

To calculate your debt-to-income ratio, you add up all of your monthly debt payments and divide them by the amount of your gross monthly income. Your gross monthly income is typically the amount of money you have earned before your taxes and other deductions. Here is an example, if you pay $1,200 a month for your mortgage and another $300 a month for an auto loan and $500 a month on the rest of your debts, your monthly debt payments are $2,000. ($1,200 + $300 + $500 = $2,000.) If your gross monthly income as a nurse is $6,000, then your debt-to-income ratio is 33 percent. ($2,000 is 33% of $6,000.)

What is the 43 Percent Rule?

Research suggests that borrowers with a higher debt-to-income ratio are more likely to have trouble making monthly payments and could default on the loan. Because of this, the 43 percent debt-to-income ratio has been established because, in most cases, that is the highest ratio a borrower can have and still qualify for a mortgage.

Some Lenders May Make an Exception

There are some exceptions, depending on the “size” of the creditor. A small creditor with less than $2 billion in assets the previous year and providing no more than 500 mortgages during the last year, is allowed to offer a qualified mortgage with a debt-to-income ratio higher than 43 percent. Some larger lenders may still give you a mortgage loan if your debt-to-income ratio is more than 43 percent, but they will have to make a reasonable, good-faith effort to determine that you can repay the loan.

Learn more About Debt to Income Ratio at Primary Residential Mortgage, Inc.

If you would like to learn more about qualifying for a home loan, speak with your favorite loan representative at Primary Residential Mortgage, Inc. We’re always happy to help.

 

Note: Opinions expressed are solely my own and do not express the views of my employer