A Lender’s Take on Debt-to-Income Ratios

Debt-to-income ratios seem to generate many questions from borrowers. If you have questions on this subject, the information below may help answer them.


As well as the mortgage payments you are hoping to take on in purchasing or refinancing your home, your revolving and installment debt represent the greatest concerns to lenders. These include such items as car and credit card payments, as well as other types of loans, if you have them.

Note that lenders usually aren’t concerned about things like gas bills and bills for food and clothing, unless you’re applying for some types of VA loans.


The income that lenders use in their calculations is gross income. This is what you make before any taxes are withdrawn. You will be asked to show two years of income documentation, meaning: full tax returns, W-2 forms, and up to two months of your recent pay stubs.

If you are either self-employed or in a commissioned position, you will have to be able to demonstrate two years of history in that job. If you have previously received a base salary, but have recently begun to receive commissions, these commissions will be prorated over a two-year period.

The Ratio

Your debt-to-income ratio can be found by dividing all your debt by your income. For example, if you make $4,000 per month, and the debt you carry, as described above, totals $1,500 per month, your debt-to-income ratio is $1,500/$4,000, or 37.5 percent. Ideally, your lender would like your ratio to be in the 40 percent range, or lower. In fact, the lower, the better.

In the long term, events such as adding a new family member and changing your employment status can affect your income, and therefore your debt-to-income ratio. These are important items to factor in when considering how much home to buy. Discuss any concerns with your mortgage professional.

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