The “debt-to-income ratio“, or “DTI ratio” as it’s known in the mortgage industry, is the way a bank or lender determines what you can afford in the way of a mortgage payment.
By dividing all of your monthly liabilities (including the proposed housing payment) by your gross monthly income, they come up with a percentage. This key figure is known as your DTI, and must fall under a certain number in order to qualify for a mortgage.
The maximum debt-to-income ratio will vary by the mortgage lender, loan program, and investor, but the number generally ranges between 40-50%.
Here’s a basic example of the debt-to-income ratio:
$120,000 annual gross income as reported on your tax returns/W-2 form
Monthly liabilities: $3,500
Monthly gross income: $10,000
35% debt-to-income ratio
In this example, your debt-to-income ratio would be 35% ($3,500/$10,000)