Consumers who are interested in purchasing a home should understand their debt to income ratio. For many, this is a new term and one that they may not fully understand. The term is used primarily when purchasing a home for lenders to determine the maximum payment you may afford.
Your income is calculated on a gross basis, the amount you earn prior to taxes. Income from all sources should be considered if they are stable. In addition to your weekly paycheck, maintenance payments for child support or alimony may be included if they are expected to endure for more than five years. Income from royalties, annuities and other investment income may also be included if it is stable.
To accurately determine the amount of debt you have on a monthly basis, you will need your credit card bills, car payment bills and maintenance payments for child support or alimony. In addition, you should include your potential mortgage payments including taxes and insurance for the most accurate calculation.
The final calculation
The final calculation is reached by multiplying total debt against total income. The lower your debt to income ratio, the easier it will be to
qualify for a loan. Some programs allow for debt as high as 41 percent though most lenders will prefer this amount be lower.