How do you determine debt-to-income ratios?


Quick Answer

To determine a debt-to-income ratio, a person divides the total of all monthly debt payments by monthly gross income, according to About.com. If the total debt is $1,500 and the total income is $4,000, for instance, the result is 0.375. Expressed as a percentage, the debt-to-income ratio is 37.5 percent.

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Full Answer

The income amount includes the total of regular salary distributions, bonuses, commissions, tips, alimony and investment income, according to Zillow. A person who earns $4,000 in gross monthly salary plus $400 in alimony payments would have a total gross monthly income of $4,400.

Home loan payments, car loan payments, student loan payments and credit card payments are common debt obligations, according to Zillow. Alimony and child support payments are also included in the debt payment total. A person with a $600 monthly mortgage payment, $250 car payment and $200 credit card payment has a total monthly debt obligation of $1,050.

Debt-to-income is important to a lender evaluating a person's ability to take on a new loan. A conventional mortgage lender typically prefers a maximum 36 percent debt-to-income and 28 percent mortgage-to-income ratio for a new borrower as of 2014, according to Bankrate. While mortgages are sometimes approved in excess of these ratios, a borrower with high debt leverage faces the risk of default or bankruptcy.

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