MANGROVE REALTY ASSOCIATES
Lori Madden, MANGROVE REALTY ASSOCIATES
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Understanding Debt to Income Ratios and Why They Matter

by Lori Madden 08/23/2020

Image by Mimzy from Pixabay

As you start your journey to home ownership, one of the terms you may hear from your mortgage lender is debt to income ratio. Many people have never heard this term before, but it is an important aspect of obtaining a mortgage. Your mortgage lender wants to make sure you are not going to default on your mortgage payments. While your current credit history plays a role in this determination, your debt to income ratio also is considered.

Your debt to income ratio is the percentage of your gross income against the amount you are obligated to pay monthly. This means your credit card bills, car loans, life, health, and other insurance premiums may be considered, along with your anticipated mortgage payment and taxes. Generally, a lender will want your debt to income ratio to be at or lower than 43 percent of your income.

Calculate Your Ratio Early in the Process

Potential homebuyers can easily determine what their debt to income ratio is based on current mortgage interest rates and the amount they are seeking to borrow to purchase a home. To calculate the ratio, you will need the following information:

  • Total annual salary — since a lender will review your taxes for the past three years, the best method is to use your most recent tax return and get your gross annual income before taxes. Once you have this number, divide it by 12 for calculating your gross monthly income.
  • Monthly debt ratio — you will want to determine what debts you are obligated to pay monthly. This should include student loans, car payments, and any other debt which you expect to pay for at least five years including personal loans. Using a mortgage calculator, determine what you anticipate your mortgage payment will be including property taxes and insurance. Make sure you include all costs associated with your mortgage when using a mortgage calculator. The totals you get here will generate the total amount of your monthly debts.
  • Final calculation — the final calculation will be determining your debt to income ratio. This is your total monthly debt divided by your gross monthly income is equal to your debt to income ratio.

High debt to income ratios can impact your ability to secure a mortgage. However, an important thing to remember is that some lenders do have some flexibility when using debt to income ratios. There are lenders who are exempt from the “ability to repay” rules for qualified mortgages. Talk to your mortgage lender about your debt to income ratio if the numbers are problematic. They can provide you with the available mortgage options based on your ratio.

About the Author
Author

Lori Madden

As a Florida native growing up in Sarasota, I have seen my hometown grow from a sleepy coastal town to a highly sought-after destination along the shores of the Gulf of Mexico. After working in Chicago for 5 years, I returned to Sarasota and saw it through a new lens and really began to appreciate what makes Sarasota so desirable, including temperatures that allow for year round outdoor activities including tennis (a personal favorite), golf, boating, kayaking, fishing, paddle boarding, or just relaxing and/or shelling on our pristine sandy shores, including Dr. Beach’s #1 beach in the United States for 2017, Siesta Key! Sarasota’s cultural amenities are many and diverse, appealing to a wide range of arts lovers. Downtown Sarasota has become a destination in itself, drawing many new developments for those who want to be within walking distance of Main Street's offerings and the picturesque bayfront and marina. Foodies will find an eclectic mix of locally owned and operated restaurants offering something for everyone, and there are now Farmers Markets every day of the week in various locations throughout Sarasota, but the Saturday morning Farmers Market in downtown Sarasota draws the biggest crowds. Since 1988, my passion has been selling real estate, representing both buyers and sellers. I have been recognized by my clients and customers for an uncompromising work ethic and dedication to helping them achieve their real estate goals. Relying on my experience as a real estate paralegal and being highly organized, I am able to help make the transition between contract and closing a smooth one for my clients. With an eye for interior and landscape design, I've been known to pitch in and help Sellers minimize and/or reorganize their belongings in order to stage their home to maximize its sale potential. I specialize in out of state buyers looking for their piece of paradise along the Gulf Coast and make it a priority to keep them up to date on our quickly changing local real estate market. I welcome the opportunity to share with you all Sarasota and her surrounding islands have to offer!