Debt-to-Income Ratio for Mortgage Loans

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.

For example, if your total household income is $80,000, your monthly income is $6,667. At 28 percent, you can afford to spend $1,867 on mortgage payments (PITI) per month. At 36 percent you would get a total of $2,400 in debt-related expenses per month.

At this point you are ready to consider your loan options and use online calculators to see where you stand. Continuing with the example above, if you find a mortgage loan that would cover your needs would require an inclusive PITI monthly payment of $1,500, you would be well under your $1,867 limit. Next, factor in your average monthly credit card expenses, car payments, and any other rotating charges. If that total came to $800, your total debt burden would be roughly $2,300 -- $100 less than your $2,400 limit.

Ultimately it is up to you to apply these formulas and ratios to your own financial situation. Remember, while the numbers may help you get approved for a loan, they won’t provide you with the whole story. Some people can afford a little more, which others should pay less depending on lifestyles and other factors.

Read "Choosing Rates vs. Points in a Mortgage Loan" and "Finding the Best Mortgage Loan Rate."