How to Determine the Debt Ratio for a Mortgage Lender

A mortgage lender could determine if you qualify for certain loan products based on your credit and your debt ratio. If you are reluctant to provide copies of your income documents, you could perform a calculation that gives prospective lenders your estimated debt ratio. Lenders use debt ratios to determine if an affordable portion of your income could be dedicated toward paying a mortgage loan. Conventional mortgage lenders permit borrowers to have from about 28 percent to 36 percent of their income go toward housing expenses.

Instructions

Calculate your monthly income. Use your most recent W-2 form and the annual amount of other income sources to help determine your monthly income. Divide the total amount by 12 months.

Obtain your estimated mortgage payment. Use an online mortgage calculator to compute your approximate monthly payment (see Resources). You'll need to enter items such as the loan amount, interest rate and the number of years needed to repay your loan. Ask prospective mortgage lenders to provide an estimated interest rate for the product that you're seeking.

Divide the amount of your estimated monthly mortgage payment into the amount of your monthly income to determine your front-end debt ratio. For instance, if your mortgage payment equals $750 per month and your income equals $3,000 per month, your front-end debt ratio equals 25 percent ($750 divided by $3,000 equals 25 percent).

Tally all monthly payments that appear on your credit report. Get a copy of your credit report at annualcreditreport.com.

Find the projected amount of your monthly debt. Combine your projected mortgage payment and the total monthly payments from your credit report to obtain your cumulative monthly debt. For instance, if your estimated mortgage payment equals $750 and the monthly debts shown on your credit report equal $150, your debt would equal $900 per month.

Divide the amount of your total monthly debt into the amount of your monthly income to determine your back-end ratio. For instance, if your cumulative debt equals $900 per month and your income equals $3,000 per month, your back-end ratio equals 30 percent ($900 divided by $3,000 equals 30 percent).

Inform your mortgage lender of your front-end debt ratio (result from Step 3) and your bank-end debt ratio (result from Step 6).

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