How To Calculate Debt-to-Income (DTI) Ratio

How To Calculate Debt-to-Income (DTI) Ratio

Step 1: Your debt-to-income ratio is calculated by adding up all your monthly debt payments and dividing them by your gross monthly income.

Add up your monthly bills which may include:

  • Monthly mortgage principal & interest payment (For all properties owned)
  • Monthly private mortgage insurance payment (For all properties owned)
  • Monthly escrow payment for home insurance and property taxes (For all properties owned)
  • Monthly HOA fee (For all properties owned; if applicable)
  • Monthly alimony or child support payments
  • Student loan payments
    • Income-Based-Repayment (IBR) plans ONLY allowed on Conventional financing (e.g. Fannie Mae, Freddie Mac).
    • IBR plans not allowed on FHA financing. FHA requires a fully amortized payment or 1% of balance used to “calculate” a payment.
  • Auto loan payments
  • Credit card monthly payments (use the minimum payment)
  • Monthly payments for all other properties owned
  • Other debts

CAUTION: DTI ratios are extremely sensitive, and missing one important thing could be the difference between approval and denial.

Note: Expenses like groceries, utilities, gas, and your taxes generally are not included

Step 2: Divide the total by your gross monthly income, which is your income before taxes.

Step 3: The result is your DTI, which will be in the form of a percentage. The lower the DTI; the less risky you are to lenders, and the greater your chances of approval.

tfrank@newcapfinance.com

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