Debt-To-Income Ratio

How much can you afford to borrow?  Most lenders calculate your debt-to-income ratio to help determine whether you can afford the loan applied for.  You may calculate your own debt-to-income ratio by adding up all monthly debt payments such as mortgage or rent payment, car payment, student loan payment, etc.  Then divide that total by your total gross monthly income.  For example, suppose you and your spouse are currently renting and want to purchase a $150,000 house.  You would calculate your debt-to-income ratio as follows:

Some lenders will not make loans to people whose debt-to-income ratio exceeds 35%, others allow higher ratios.  Generally, the higher your income, the more likely you are to be able to borrow beyond 35% without causing yourself financial hardship.