How to Calculate Debt-to-Income Ratio

Gross monthly income

x

DTI ratio

Allowed monthly debt

Allowed monthly debt

-

Monthly debt reflected on credit report

Limit for new mortgage payment

Example

Gross monthly income

$7,000

x

x

DTI ratio

0.5

Allowed monthly debt

$3,500

Allowed monthly debt

$3,500

-

-

Monthly debt reflected on credit report

$1,100

Limit for new mortgage payment

$2,400

***Note: if new purchase is an investment AND the borrower has a 2 year landlord history, most lenders

will allow 75% of the appraiser's estimate of market rent or current lease terms on the subject property to be included as monthly income. If the borrower owns additional rental properties, the formula to calculate rental income from Schedule E of their tax returns is:

(Net income or loss + Depreciation) / 12 = Monthly income or loss

It is also important to note that any debt not reflected on the credit report (utility bills, cell phone, gym membership, contributions to life insurance, etc) does not count against this ratio. Essentially, the remaining 50% is supposed to encompass the excess living expenses.