Debt-to-Income Ratio Calculator

Understanding Debt-to-Income Ratio

Why is Debt-to-Income Ratio Important for Homebuyers?

Debt-to-income ratio is one of the key figures mortgage lenders will look at to determine the level of risk associated with issuing a mortgage to a homebuyer. A potential borrower with a higher debt-to-income ratio poses a greater risk to lenders of not being able to handle a monthly mortgage payment on top of their existing debt obligations. The good news is that if your debt-to-income ratio is higher than you’d like it to be, there are ways to lower it – more on that below.

How to Calculate Debt-to-Income Ratio

The easy answer is to use the handy calculator on this page! But it’s also fairly easy to calculate your debt-to-income ratio by hand if you feel so inclined. Simply add up your monthly debt payments – including your current rent or mortgage, car payment, student loans, credit card payments, child support, and personal loans – and then divide that sum by your monthly income and multiply that number by 100. For instance, if your monthly debt payments add up to $3000 and your monthly income is $8000 then you’re DTI ratio is 37.5% (3000/8000 = 0.375 x 100 = 37.5).

What is a Good Debt-to-Income Ratio?

The answer to this question will vary by lender, but generally, a debt-to-income ratio lower than 35% is viewed as favorable meaning you’ll have the flexibility to handle a monthly mortgage payment after paying all of your other monthly bills. Debt-to-income ratios between 36-50% are generally viewed as adequate but might lead to other eligibility requirements from lenders, and ratios above 50% will generally lead to limited borrowing options as you may have trouble handling a mortgage payment on top of your other monthly debt payments.

What is Front-End Ratio?

The front-end-ratio, also known as the housing ratio or mortgage-to-income ratio, is a DTI figure used by lenders to determine what percentage of your monthly gross income would go toward your future housing expenses including your mortgage payment, property taxes, homeowners insurance, and any HOA fees. You can calculate your front-end-ratio by dividing your total anticipated monthly housing costs by your monthly gross income and multiplying by 100.

What is Back-End Ratio?

The back-end-ratio is used by lenders to determine what percentage of your monthly gross income will go toward all of your monthly debt obligations. Essentially, it includes all of the housing costs that go into calculating the front-end ratio plus any other monthly debt payments like credit card debt, car payments, student loans, etc. The back-end ratio is what most lenders use to determine DTI ratios for borrowers.

How to Lower Your Debt-to-Income Ratio

If you’re considering purchasing a home and your current debt-to-income ratio is higher than you’d like it to be, there are several ways to lower your ratio.

First, avoid taking on any additional debt if possible. This means forgoing any big purchases that you were planning to put on your credit card as well as avoiding taking on additional new loans.

Next, if you don’t already track your monthly spending with a budget, you should consider doing so. This will make it easier to determine which recurring purchases you’re making aren’t necessary (think of that streaming service you haven’t watched in a few months) so you can divert those funds to pay down your existing debt.

You should also consider how you can most efficiently reduce your existing debt – when possible make more than the minimum required payment on your credit card bill and other loans. You can use the debt snowball method which involves paying off your smallest credit balance first, and then moving to the next smallest balance, and so on. You can also call your credit card company and see if they would consider lowering your interest rate – if your account is in good standing many credit card companies will grant you a lower rate. Another option is to consolidate any high-interest rate debt into a loan with a lower interest rate.

While sometimes easier said than done, an effective way to lower your debt-to-income ratio is to earn more money. This could mean asking for a raise, picking up extra hours, or taking on some freelance work. Any additional income will help lower your debt-to-income ratio.