When a new homebuyer applies for a loan, the bank will look for assurance that the borrower will be able to afford their monthly mortgage payments. The debt to income (DTI) ratio is one factor that a lender will consider when determining whether to grant a mortgage loan. The DTI is a calculation that considers the borrower’s total gross monthly income divided by their total recurring monthly debt. For example, if the borrower makes $2,500 a month and has $1,000 worth of expenses and debt, the DTI would be 40%. Most lenders look for a good balance of debt to ratio.

In 2014, the Qualified Mortgage rule was created to protect both lenders and borrowers from entering a loan that would likely go into default. According to this rule, for a conventional loan, you will need a 43% or lower DTI, but there are other programs (like the FHA loan) that will be a bit more lenient when it comes to debt to income ratios. It is important for a homebuyer to understand how to calculate their DTI in order to predict what type of home loan they will qualify for. The debt to income is also taken into consideration if you decide to refinance a mortgage.

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