Your debt to income ratio is a ratio that your lender will use to determine how much money you can get loaned to purchase a house. There are some debts that will count against you and others that won’t. Watch the video below for a full explanation!
Expenses that are included in your debt to income ratio:
- Credit Cards
- Car Payment
- Medical Bills
- Any revolving debt that has consistent monthly payments required
Expenses that aren’t included in your debt to income ratio:
- Power bill
- Sewer and water bills
- Electric bill
To calculate your debt-to-income ratio, add up all your monthly debt payments that are listed above and divide them by your gross monthly income. Your gross monthly income is generally the amount of money you have earned before taxes and other deductions are taken out of your paycheck.
If you own a home right now and are looking to buy another one and sell yours first, then you won’t actually use your current mortgage payment. You’ll get rid of that, too, because your lender will qualify you as if you already have sold that house. You will have the total amount of debt but your lender will use your minimum monthly payments required.
Now, if you are self-employed and own your own business, typically, you will need two years worth of tax returns showing your income. So, that’d be your adjusted gross income and that would effectively look like a salary.