Debt-to-Income Ratio for Mortgage Loans

Prospective homebuyers must answer many questions, but the first is always "How much home can I afford?" In the past, the rule of thumb was to shop for a home worth about two and a half times your total household annual gross income. So if a couple had a combined annual gross income of $100,000, they could afford a $250,000 home. But today, low interest rates and the ability to put as little as 5 percent down means home buyers have much more flexibility when they go shopping for a home.

Calculating a debt-to-income ratio will give you a much better idea of how much of your income will be available for monthly mortgage payments, including principal, interest, taxes and insurance -- collectively referred to as "PITI".

Many experts agree that the total amount you pay toward your mortgage (PITI) should not exceed 28 percent of your gross income. The total amount you pay in debt-related expenses, including your mortgage, car loan payments, credit card bills, student loan payments, and any other debts, should not exceed 36 percent of your income.

So how much can you afford to pay each month? The first step is to determine your total income. This includes not only your regular salary, but also:

• Bonuses
• Regular income from dividends and interest.
• Assistance or support payments, such as alimony or child support
• Payment from tips or commissions

The total of all these figures will give you your gross annual income; dividing by 12 will yield your monthly gross income. Multiplying your monthly income by .28 will give you an idea of how much you can afford in monthly mortgage payments.