Debt-to-Income Ratio Calculator

The two ratios, and which one bites

Lenders calculate two. The front-end ratio is housing alone against gross income; the back-end adds every other monthly obligation. The conventional guideline is 28 percent front and 36 percent back, and the widely used ceiling for a qualified mortgage is 43 percent back-end. Some programmes stretch further — FHA lending regularly approves above 50 with strong compensating factors — but 43 is the number worth planning around.

For most applicants it is the back-end ratio that decides the outcome, and usually one specific item inside it does the damage: a car payment.

A car payment costs more than a car

Because the ratio is a proportion, a $600 car payment does not merely cost $600. On a 6.5 percent mortgage it removes roughly $95,000 of borrowing capacity. People routinely finance a car a few months before applying for a mortgage and discover the house they wanted is no longer available to them. If a mortgage is coming, do nothing to your debt profile for at least six months beforehand.

What counts and what does not

Underwriters count obligations that appear on a credit report or a court order: loan payments, credit card minimums, child support, alimony. They do not count utilities, groceries, insurance premiums that are not part of housing, phone bills or day care, however large those are. This is worth knowing in both directions — a household can qualify comfortably on paper while being genuinely stretched, because the expenses that actually consume its income are invisible to the calculation.

Note also that credit cards are counted at their minimum. Paying a card off in full each month does not remove it; the minimum on the reported balance still counts. Paying the balance down before the statement date does.

Gross income, and what qualifies as income

The ratio uses gross pay, which flatters it relative to how the money actually feels. Self-employed applicants are assessed on net profit after expenses, typically averaged over two years, which usually produces a much lower figure than turnover. Bonus and overtime income generally needs a two-year history before a lender will count it at all.

Improving the ratio

Only two things move it: less debt or more income, and debt moves faster. Clearing a small loan entirely beats reducing several large ones, because the ratio counts monthly payments rather than balances — a $3,000 loan with a $300 payment does more damage than a $30,000 loan at $200. Pay off by payment size, not by balance, when a mortgage application is the goal.