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

Multiple accounts can make it easier to follow a monthly budget

How to talk to your lender about debt

What is a good credit score?

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

Crypto + Relo: Mobility industry impacts

7 steps to keep your personal and business finances separate

How to use your unexpected windfall to reach financial goals

Evaluating interest rate risk creating risk management strategy

5 steps to selecting your first credit card

Don’t underestimate the importance of balancing your checking account

Hybridization driving demand

Credit: Do you understand it?

What types of credit scores qualify for a mortgage?

Test your loan savvy

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

How do I prequalify for a mortgage?

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

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

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

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

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

8 steps to take before you buy a home

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

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

How to use your home equity to finance home improvements

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

These small home improvement projects offer big returns on investment

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

5 things to avoid that can devalue your home

6 questions to ask before buying a new home

What is refinancing a mortgage?

What is an escrow account? Do I have one?

Quiz: How prepared are you to buy a home?

10 questions to ask when hiring a contractor

What to know when buying a home with your significant other

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

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

Dear Money Mentor: When should I refinance a mortgage?

Building a dream home that fits your life

Are professional movers worth the cost?

First-time homebuyer’s guide to getting a mortgage

Beyond the mortgage: Other costs for homeowners

How I did it: Bought my dream home using equity

Get more home for your money with these tips

What are conforming loan limits and why are they increasing

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

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

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

Community activist achieves dream of homeownership

Bringing economic opportunity to underserved communities one home at a time

Managing the impacts of appraisal gaps in a hot housing market

Is it the right time to refinance your mortgage?

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

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

Is it cheaper to build or buy a house

Money Moments: How to finance a home addition

The lowdown on 6 myths about buying a home

Home buying myths: Realities of owning a home

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

How to use credit cards wisely for a vacation budget

For today's homebuyers, time and money are everything

Which debt management technique is right for you?

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

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

10 uses for a home equity loan

Know your debt-to-income ratio

Your guide to breaking the rental cycle

Things to know about the Servicemembers Civil Relief Act

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

Tips to overcome three common savings hurdles

Save time and money with automatic bill pay

5 myths about emergency funds

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

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

Is raising backyard chickens a good idea financially?

Here’s how to create a budget for yourself

Common unexpected expenses and three ways to pay for them

9 simple ways to save

Do you and your fiancé have compatible financial goals?

7 steps to prepare for the high cost of child care

6 pandemic money habits to keep for the long term

Is online banking safe?

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

Private equity and the full-service administrator

Should you give your child a college credit card?

Webinar: Uncover the cost: Building a home

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

Adulting 101: How to make a budget plan

You can take these 18 budgeting tips straight to the bank

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

Changes in credit reporting and what it means for homebuyers

Top 3 considerations when selecting an IPA partner

How liquid asset secured financing helps with cash flow

How you can take advantage of low mortgage rates

5 financial goals for the new year

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

Consolidating debts: Pros and cons to keep in mind

Myth vs. truth: What affects your credit score?

Improving your credit score: Truth and myths revealed

How to build and maintain a solid credit history and score

Decoding credit: Understanding the 5 C’s

How to improve your credit score

6 essential credit report terms to know

Should rising interest rates change your financial priorities?

5 ways to maximize your garage sale profits 

What you need to know about renting

Personal finance for teens can empower your child

5 unique ways to take your credit card benefits further

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

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

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

What’s your financial IQ? Game-night edition

How to use debt to build wealth

How having savings gives you peace of mind

How to build credit as a student

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

Common small business banking questions, answered

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

10 ways to increase your home’s curb appeal

Money Moments: Tips for selling your home

How I did it: My house remodel

Everything you need to know about consolidating debts

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

Crypto + Homebuying: Impacts on the real estate market

Your quick guide to loans and obtaining credit

How to save for a wedding

Military homeownership: Your guide to resources, financing and more

Webinar: Uncover the cost: Home renovation

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

4 questions to ask before you buy an investment property

Good debt vs. bad debt: Know the difference

Preparing for homeownership: A guide for LGBTQ+ homebuyers

Are you ready to restart your federal student loan payments?

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

Why other lenders may be reaching out to your employees

What type of loan is right for your business?

Closing on a house checklist for buyers

Leverage credit wisely to plug business cash flow gaps

Evaluating interest rate risk creating risk management strategy

Housing market trends and relocation impact

How to maximise your infrastructure finance project

Luxembourg's thriving private debt market

Checklist: 10 questions to ask your home inspector

How to establish your business credit score

How to establish your business credit score

Checklist: 6 to-dos for after a move

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

4 small business trends that could change the way you work

Pros and cons of a personal line credit

3 tips for saving money when moving to a new home

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

Avoiding the pitfalls of warehouse lending

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

A checklist for starting a mobility program review

High-cost housing and down payment options in relocation

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

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

Checklist: financial recovery after a natural disaster

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.