fdic

FDIC-Insured - Backed by the full faith and credit of the U.S. Government

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

How liquid asset secured financing helps with cash flow

Housing market trends and relocation impact

Hybridization driving demand

What type of loan is right for your business?

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

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

Luxembourg's thriving private debt market

Integrating regulated and unregulated debt investment vehicles

Top 3 considerations when selecting an IPA partner

How to maximise your infrastructure finance project

Private equity and the full-service administrator

Evaluating interest rate risk creating risk management strategy

Avoiding the pitfalls of warehouse lending

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

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

Crypto + Relo: Mobility industry impacts

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

Common small business banking questions, answered

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

How to establish your business credit score

Leverage credit wisely to plug business cash flow gaps

5 financial goals for the new year

How to manage your money: 6 steps to take

Should rising interest rates change your financial priorities?

Avoid these 6 common mistakes investors make

Good debt vs. bad debt: Know the difference

Closing on a house checklist for buyers

Checklist: 10 questions to ask your home inspector

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?

Is raising backyard chickens a good idea financially?

Is it cheaper to build or buy a house?

6 pandemic money habits to keep for the long term

5 myths about emergency funds

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

Adulting 101: How to make a budget plan

How having savings gives you peace of mind

What’s your financial IQ? Game-night edition

Tips to overcome three common savings hurdles

You can take these 18 budgeting tips straight to the bank

Things to know about the Servicemembers Civil Relief Act

Do you and your fiancé have compatible financial goals?

Common unexpected expenses and three ways to pay for them

Save time and money with automatic bill pay

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

Personal finance for teens can empower your child

Don’t underestimate the importance of balancing your checking account

9 simple ways to save

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

How to save for a wedding

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

Here’s how to create a budget for yourself

Multiple accounts can make it easier to follow a monthly budget

7 steps: How couples and single parents can prepare for child care costs

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

What you need to know about renting

How to talk to your lender about debt

Which debt management technique is right for you?

Everything you need to know about consolidating debts

Consolidating debts: Pros and cons to keep in mind

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

How to use credit cards wisely for a vacation budget

5 steps to selecting your first credit card

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

Know your debt-to-income ratio

How to use debt to build wealth

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

Your quick guide to loans and obtaining credit

How to use your unexpected windfall to reach financial goals

7 steps to keep your personal and business finances separate

Is it cheaper to build or buy a house

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

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

For today's homebuyers, time and money are everything

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

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

Managing the impacts of appraisal gaps in a hot housing market

Crypto + Homebuying: Impacts on the real estate market

Preparing for homeownership: A guide for LGBTQ+ homebuyers

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

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

Your guide to breaking the rental cycle

What are conforming loan limits and why are they increasing

Webinar: Uncover the cost: Building a home

Community activist achieves dream of homeownership

Checklist: 6 to-dos for after a move

Military homeownership: Your guide to resources, financing and more

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

Bringing economic opportunity to underserved communities one home at a time

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

How I did it: My house remodel

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

Money Moments: How to finance a home addition

Home buying myths: Realities of owning a home

Are professional movers worth the cost?

Money Moments: Tips for selling your home

The lowdown on 6 myths about buying a home

Get more home for your money with these tips

First-time homebuyer’s guide to getting a mortgage

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

Dear Money Mentor: When should I refinance a mortgage?

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

Quiz: How prepared are you to buy a home?

10 ways to increase your home’s curb appeal

10 questions to ask when hiring a contractor

Building a dream home that fits your life

Beyond the mortgage: Other costs for homeowners

How you can take advantage of low mortgage rates

5 things to avoid that can devalue your home

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

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

What is an escrow account? Do I have one?

These small home improvement projects offer big returns on investment

Webinar: Mortgage basics: How much house can you afford?

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

Is it the right time to refinance your mortgage?

What is refinancing a mortgage?

What to know when buying a home with your significant other

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

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

Webinar: Mortgage basics: 3 Key steps in the homebuying process

How do I prequalify for a mortgage?

Webinar: Mortgage basics: Finding the right home loan for you

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

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

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

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

How to use your home equity to finance home improvements

4 questions to ask before you buy an investment property

10 uses for a home equity loan

8 steps to take before you buy a home

6 questions to ask before buying a new home

Webinar: Uncover the cost: Home renovation

Improving your credit score: Truth and myths revealed

Test your loan savvy

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?

Myth vs. truth: What affects your credit score?

Decoding credit: Understanding the 5 C’s

6 essential credit report terms to know

5 unique ways to take your credit card benefits further

What types of credit scores qualify for a mortgage?

What is a good credit score?

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

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 by U.S. Bank National Association. Deposit products are offered by U.S. Bank National Association. Member FDIC.