Know your debt-to-income ratio

April 09, 2020

Knowing how to calculate your debt-to-income ratio is an important part of the home-buying process.

 

Once you've made the decision to buy a home, you’ll start the exciting process of searching for that perfect house. This is part detective work and part treasure hunt. After all, every home buyer is different and with so many houses out there to purchase, finding the one to match your budget and match your tastes can be quite an adventure.

One of the first things you need to do is figure out your budget, and one of the main factors that determines your budget is the size of the loan you can get approved for.

 

The importance of your debt-to-income ratio

Many lenders who are deciding on the type, size and interest rate of the loan to offer you will take a close look at your debt-to-income ratio. Basically, this is the amount of reoccurring debt you have relative to your monthly income.

Ideally, this number should be low. When lenders see a lower number, it’s evidence that you will have more available income to pay your monthly mortgage, hence the more money they’re willing to lend.

If you keep your debt-to-income rate below 36 percent, you’ll be in good standing.

 

An easy calculation

How do you arrive at this ratio? The calculation is actually quite simple. Take your total reoccurring (monthly) debt and divide it by your gross monthly income.

For instance, let’s say you have $1,000 in reoccurring monthly payments and earn $4,000 each month. Simply divide 1,000 by 4,000 and you will get .25, or 25 percent.

The total monthly debt obligations should include, but are not limited to:

  • Student loans
  • Automobile loans
  • Minimum monthly payment on credit cards 
  • Any other mortgages you have
  • Child support and/or alimony payments
  • Any other monthly debt obligations
     

Understanding your debt-to-income ratio is an important first step on the house-buying journey. Determining your ratio can help you to craft a financial strategy for how to proceed to get you into the home of your dreams.

 

To learn more about ways to achieve your financial goals, visit U.S. Bank online or speak to a mortgage loan officer.

Related content

What is a home equity line of credit (HELOC) and what can it be used for?

Multiple accounts can make it easier to follow a monthly budget

Housing market trends and relocation impact

How liquid asset secured financing helps with cash flow

Hybridization driving demand

What type of loan is right for your business?

Programme debt Q&A: U.S. issuers entering the European market

Luxembourg's thriving private debt market

Maximizing your infrastructure finance project with a full suite trustee and agent

Top 3 considerations when selecting an IPA partner

Avoiding the pitfalls of warehouse lending

Evaluating interest rate risk creating risk management strategy

Changes in credit reporting and what it means for homebuyers

What’s the difference between Fannie Mae and Freddie Mac?

Why other lenders may be reaching out to your employees

A checklist for starting a mobility program review

High-cost housing and down payment options in relocation

Crypto + Relo: Mobility industry impacts

For today's relocating home buyers, time and money are everything

Streamline operations with all-in-one small business financial support

How I did it: Turned my side hustle into a full-time job

How to establish your business credit score

Tips for realtors to help clients get their homeownership goals back on track

4 small business trends that could change the way you work

Common small business banking questions, answered

3 signs it’s time for your business to switch banks

Leverage credit wisely to plug business cash flow gaps

How to establish your business credit score

5 financial goals for the new year

Good debt vs. bad debt: Know the difference

Checklist: 10 questions to ask your home inspector

Closing on a house checklist for buyers

Checklist: financial recovery after a natural disaster

How to build credit as a student

Recognize. React. Report. Caregivers can help protect against financial exploitation

Is online banking safe?

Pros and cons of a personal line credit

3 tips for saving money when moving to a new home

5 ways to maximize your garage sale profits 

Is raising backyard chickens a good idea financially?

How I did it: Learned to budget as a single mom

5 myths about emergency funds

Tips to overcome three common savings hurdles

Adulting 101: How to make a budget plan

How having savings gives you peace of mind

What’s your financial IQ? Game-night edition

Things to know about the Servicemembers Civil Relief Act

You can take these 18 budgeting tips straight to the bank

Save time and money with automatic bill pay

Common unexpected expenses and three ways to pay for them

Which is better: Combining bank accounts before marriage — or after?

Do you and your fiancé have compatible financial goals?

Personal finance for teens can empower your child

Is it time to get a shared bank account with your partner?

It's possible: 7 tips for breaking the spending cycle

How to save for a wedding

Here’s how to create a budget for yourself

Don’t underestimate the importance of balancing your checking account

9 simple ways to save

7 steps to prepare for the high cost of child care

5 tips to use your credit card wisely and steer clear of debt

What you need to know about renting

Are you ready to restart your federal student loan payments?

Consolidating debts: Pros and cons to keep in mind

How to talk to your lender about debt

Which debt management technique is right for you?

Everything you need to know about consolidating debts

5 tips to use your credit card wisely and steer clear of debt

5 steps to selecting your first credit card

How to use debt to build wealth

What’s a subordination agreement, and why does it matter?

Understanding the true cost of borrowing: What is amortization, and why does it matter?

7 steps to keep your personal and business finances separate

Know your debt-to-income ratio

How to pay off credit card debt

How to use credit cards wisely for a vacation budget

Your quick guide to loans and obtaining credit

Dear Money Mentor: How do I begin paying off credit card debt?

Checklist: 10 things to look for when touring a home

Overcoming high interest rates: Getting your homeownership goals back on track

Is it cheaper to build or buy a house

For today's homebuyers, time and money are everything

Crypto + Homebuying: Impacts on the real estate market

Should you buy a house that’s still under construction?

How I did it: Bought my dream home using equity

Buying a home Q&A: What made three homeowners fall in love with their new home

House Hacks: How buying an investment property worked as my first home

Managing the impacts of appraisal gaps in a hot housing market

How I did it: Built living spaces to support my family

Spring cleaning checklist for your home: 5 budget-boosting tasks

Bringing economic opportunity to underserved communities one home at a time

Community activist achieves dream of homeownership

Saving for a down payment: Where should I keep my money?

Your guide to breaking the rental cycle

Checklist: 6 to-dos for after a move

What are conforming loan limits and why are they increasing

Military homeownership: Your guide to resources, financing and more

Uncover the cost: Building a home

How I did it: Bought a home without a 20 percent down payment

The lowdown on 6 myths about buying a home

Home buying myths: Realities of owning a home

4 ways to free up your budget (and your life) with a smaller home

Get more home for your money with these tips

Money Moments: Tips for selling your home

Money Moments: How to finance a home addition

How I did it: My house remodel

Are professional movers worth the cost?

First-time homebuyer’s guide to getting a mortgage

Dear Money Mentor: When should I refinance a mortgage?

Beyond the mortgage: Other costs for homeowners

Building a dream home that fits your life

10 ways to increase your home’s curb appeal

10 questions to ask when hiring a contractor

5 things to avoid that can devalue your home

How you can take advantage of low mortgage rates

What is an escrow account? Do I have one?

Is it the right time to refinance your mortgage?

What to know when buying a home with your significant other

What is refinancing a mortgage?

These small home improvement projects offer big returns on investment

Should you get a home equity loan or a home equity line of credit?

Mortgage basics: What’s the difference between interest rate and annual percentage rate?

Mortgage basics: What is refinancing, and is it right for you?

Mortgage basics: Prequalification or pre-approval – What do I need?

Mortgage basics: How much house can you afford?

Mortgage basics: How does your credit score impact the homebuying experience?

Mortgage basics: Finding the right home loan for you

Mortgage basics: Buying or renting – What’s right for you?

Mortgage basics: 3 key steps in the homebuying process

Is a home equity line of credit (HELOC) right for you?

How to use your home equity to finance home improvements

How do I prequalify for a mortgage?

Home equity: Small ways to improve the value of your home

Can you take advantage of the dead equity in your home?

8 steps to take before you buy a home

6 questions to ask before buying a new home

4 questions to ask before you buy an investment property

10 uses for a home equity loan

How to request a credit limit increase

Improving your credit score: Truth and myths revealed

6 essential credit report terms to know

5 unique ways to take your credit card benefits further

Myth vs. truth: What affects your credit score?

Test your loan savvy

Decoding credit: Understanding the 5 C’s

Credit: Do you understand it?

How to build and maintain a solid credit history and score

Should you give your child a college credit card?

U.S. Bank asks: What do you know about credit?

What types of credit scores qualify for a mortgage?

What is a good credit score?

How to improve your credit score

Start of disclosure content

Loan approval is subject to credit approval and program guidelines. Not all loan programs are available in all states for all loan amounts. Interest rate and program terms are subject to change without notice. Mortgage, Home Equity and Credit products are offered through U.S. Bank National Association. Deposit products are offered through U.S. Bank National Association. Member FDIC.