Do you keep hearing the phrase "Debt to Income Ratio"? Are you wondering what is this and why it is so important? In this articles I will explain what it is and how you can calculate your own debt to income ratio.

Calculate Debt to Income Ratio

When you go to a lender, they will ask you what your gross monthly income is. Or they may ask your annual salary. That's usually not a hard question to answer. So figure what that is yourself. If it is an annual salary, divide that by 12 to come up with your monthly amount. Or take your weekly check and multiply it by 4.3 to come up with a monthly figure.

Next the lender will want to know what debts you are paying on. They usually want to know every debt you are paying and how much you are paying. For example, if you are paying a credit card, they will want to know the minimum payments. Once they have this information, they will add up all the payments and minimum payments to figure your monthly debt. Now you can make that list yourself. Don't skimp, list every single debt to pay and how much you pay monthly. But only figure the minimum payments if your creditor gives you an option to pay a minimum.

Here is the secret to figuring your debt to income ratio. You divide the total monthly debt into your total monthly income. Now you can see what your DTI (debt to income ratio) is. This shows how much of your monthly income is used.

Why is This Important to the Lender

The lender wants to see if your have enough money after your debts to make a mortgage payment. Lenders like to see no more than 28% of your gross income for housing costs. Now you can see why it's a good idea to know your debt to income ratio.

Steps to Estimate

Step one: Use an online calculator to estimate those housing expenses like principle, interest, taxes and homeowners insurance. These figures are your estimated housing expenses.

Step two: Next, total up all the minimum payments for all your bills. Now add this figure to the above estimated monthly housing expenses.

Step three: Now take your monthly income and divide it into the figure you calculated in step two. What figure do you get? Now let's take this a step further.

Step four: Add up the other things like food, gas, child care, etc. that you pay for monthly. Combine this with the estimated expenses in step two.

Now take the new expense figure and divide that into your monthly income. What does that percent look like? If it comes out to 90% or more, it may not be a good idea for you to buy a home right now.

Lenders usually only consider steps 1-3 but you and I both know you spend step four also. Even though you may be able to buy a house with the debt to income ratio in step 3, you may not be able to keep the house when you figure in the expenses in step four.

So be wise in calculating your debt to income ratio. Take a close look at your situation before you make that decision to buy. By figuring your own debt to income ratio, you can work on those debts to make sure your situation is just right before you go after that mortgage. This way you guarantee you will keep your home.