Mortgage Debt to Income Ratio Calculator
Use our Mortgage Debt to Income Ratio Calculator to determine what size mortgage you qualify for based on the debt-to-income ratio used by lenders. This calculator enables you to understand how lenders view your financial profile when you apply for a mortgage. We recommend that you run multiple scenarios to understand how the debt-to-income ratio guideline applies to your financial profile.
How Our Mortgage Debt to Income Ratio Calculator Works
Lenders permit you to spend a certain percentage of your gross income on monthly debt payments, including your mortgage payment, property tax and hazard insurance plus payments for credit cards as well as car, personal and student loans. Our Mortgage Debt to Income Ratio Calculator shows you the loan you can afford using this ratio. Our calculator uses the following inputs:
Monthly Gross Income. Your debt-to-income ratio is based on your monthly gross income, or your income before any deductions such as taxes, social security or medicare. The higher your gross income, the higher the mortgage amount you qualify for.
Total Monthly Debt Payments. This figure includes payments for any loans or debts but excludes your current housing expense such as your rent or mortgage payment. Given how a debt-to-income ratio is calculated, the lower your non-housing related debt expenses, the more money you can spend on your mortgage and the higher the loan amount you qualify for. This is why it can be helpful to pay off or pay down your debt balances before you apply for a mortgage.
Interest Rate. The lower the interest rate, the higher the loan amount you can afford.
Loan Term. The longer your mortgage, the lower your monthly payment and higher the loan amount you can afford. This is why many people select 30 year mortgages.
HOA Fees. If the property you are financing requires homeowners association (HOA) dues then this expense is included in your debt-to-income ratio and reduces the loan amount you qualify for.
Our calculator applies a debt-to-income ratio to your inputs to help you understand the loan you can afford and other helpful items.
Estimated Mortgage Amount. This is the loan amount you can afford based upon the debt-to-income ratio used by the lender as well as your mortgage rate and term. The higher the ratio applied by the lender, the higher the loan amount you qualify for.
Monthly Payment. This is your monthly mortgage payment based on the loan amount you can afford. The higher the ratio used by the lender, the more you can spend on your mortgage payment and other housing costs.
Total Monthly Housing Expense. This includes your mortgage payment plus property tax and homeowners insurance so you can understand the all-in cost of owning a home. Property tax and insurance expenses are included in your debt component when lenders calculate your debt-to-income ratio.
Total Monthly Housing Expense Plus Debt. This is the total debt figure that lenders use to determine if you meet their debt-to-income ratio guideline. For example, if your total monthly housing expense plus debt is $2,000 and your monthly gross income is $5,000, your ratio is 40% ($2,000 / $5,000 = 40%). As long as the lender’s maximum debt-to-income ratio is above 40%, which it usually is, you should qualify for the mortgage.
How Lenders Qualify You for a Mortgage
Borrower Debt-to-Income Ratio
Lenders use your debt-to-income ratio to determine what size mortgage you qualify for. Your debt-to-income ratio represents the maximum amount of your monthly gross income that you can spend on total monthly housing expense (mortgage payment plus property tax, homeowners insurance and other applicable housing expenses) plus monthly debt payments such as car, student and credit card loans. Lenders usually use a maximum borrower debt-to-income ratio of 43% to 50% to determine what size mortgage you qualify for, although some lenders and mortgage programs apply higher or lower ratios. Borrowers with lower monthly debt payments can afford to spend more on their mortgage payment which enables them to qualify for a larger mortgage. On the other hand, borrowers with high monthly debt payments may find it challenging to qualify for a mortgage even if they have a high credit score and earn a decent monthly income. Borrowers looking to maximize their mortgage amount should pay down their debt to improve their debt-to-income ratio before they apply for a mortgage Use our Mortgage Debt to Income Ratio Calculator to understand how changes in your monthly debt expense impact how much mortgage you qualify for.
Ability to Repay the Loan
In addition to applying a maximum debt-to-income ratio, lenders are also required to demonstrate that borrowers have the ability to repay the loan according to specific government guidelines. In short, lenders determine if a loan is a Qualified Mortgage (QM) according to the guidelines, which means the borrower can afford and payback the mortgage. The guidelines also address lender fees, maximum mortgage length and prohibit loan features such as balloon payments and negative amortization -- when your mortgage balance can increase over the life of the loan. Interest only mortgages are also not permitted according to the Qualified Mortgage guidelines. It is important to highlight that some lenders offer mortgages that do not satisfy the Qualified Mortgage guidelines. These mortgages, however, usually require borrowers to pay a higher mortgage rate or impose stricter qualification requirements.
Borrower Credit Score
Lenders review your credit score and pull your credit report when you apply for a mortgage. Lenders typically require that borrowers have a minimum credit score of 620 although certain mortgage programs permit lower scores. Your credit score is also one of the inputs that lenders use to determine your mortgage rate, with the higher your score, the lower your interest rate. Lenders review your credit report to determine if you have experienced any adverse credit events in the past such as a bankruptcy, short sale or foreclosure. If you have experienced an adverse credit event, lenders require you to wait a certain period of time before applying for a mortgage. FREEandCLEAR recommends that borrowers review their credit score and credit report six-to-twelve months prior to applying for a mortgage to resolve any issues in your credit profile.
Borrower Employment History
Unless you are a recent college graduate, lenders typically require that borrowers have two years of continuous employment history before you apply for a mortgage. Borrowers with a break in their employment may be required to provide a written explanation for the gap although if you have extensive work experience in the same field the gap may be less of an issue. Additionally, if you have changed jobs recently and your new job has an initial probation period the lender may wait until the end of the probation period before approving you for a mortgage. Lenders usually call your employer prior to your mortgage closing to verify your employment and make sure you are still working at the job you listed on your mortgage application. It is important to highlight that military service and full-time school such as college also usually count as work history so you may not need a full two-year employment history if you recently graduated from college or served in the armed forces.
Residence History
Many lenders also consider your residence history when you apply for a mortgage. Lenders want to understand where you have lived over the past several years so that they can confirm that you have made your mortgage or rent payments on time. They may also want to understand the total monthly housing expense for your past residences so they can compare that to the mortgage payment, property tax and insurance for the home you want to buy. If your mortgage payment and housing expense are expected to increase significantly compared to what you paid in the past the lender wants to make sure that your make enough money to afford the higher payment.
Mortgage Qualification Guidelines Vary By Lender
It is important for borrowers to understand that mortgage qualification guidelines can vary by lender. While most lenders use a similar set of qualification requirements, they have some discretion in developing and applying these requirements. This is another reason why you should always contact multiple lenders when you shop for a mortgage. Lenders may use different borrower qualification requirements which means one lender may decline your loan application while another lender approves it. Although all lenders apply minimum borrower qualification standards, borrowers may need to apply to multiple lenders before being approved for their mortgage. Our calculator uses an industry standard debt-to-income ratio to determine your loan amount and monthly payment but we encourage borrowers to contact several lenders to confirm what size loan they can afford.
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Sources
"B3-6-02, Debt-to-Income Ratios." Selling Guide: Fannie Mae Single Family. Fannie Mae, February 5 2020. Web.