Debt-to-Income ratio is simply the ratio of your monthly income to the amount of your debts.
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that can save you thousands of dollars on your next home loan.
This ratio is commonly referred to as DTI.
Suppose for instance your gross income is $5,000 per month and your debts are $2,000 per month. In this example your debt to income ratio is 40%. If you are trying to refinance your mortgage loan lenders will consider your monthly gross income, not just your take home. Your gross income is the amount before taxes or any other deductions.
If you are on salary you can calculate your monthly gross income by dividing your annual salary by 12 months to come up with your monthly gross. If for example your annual salary is $40,000, dividing by 12 months gives you a monthly gross of $3,333. If you are paid hourly simply multiply your hourly rate by the number of hours you work per week to get your weekly total and multiply by 52 weeks per year. Your mortgage underwriter will do a much more detailed analysis of your monthly income; however, this method is sufficient for the purposes of this discussion.
Types of Debt-to-Income Ratios
There are two different Debt-to-Income ratios you need to be aware of when mortgage refinancing. The front end ratio is difference between your income and the mortgage loan you are applying for. The second type is the back end ratio which is the ratio between your monthly income and all of your debt, including your mortgage loan. Depending on your credit and your assets it is possible to be approved with Debt-to-income ratios as high as fifty or even sixty percent.
Keep in mind that all of your debts factor into your Debt-to-Income ratio, including student loans, credit cards, and your cars and any other accounts reported in your credit reports.