Let’s assume a borrower earns $6,000/month which would be considered their over-all gross monthly income. If that same borrower have a car payment of $600/month and a house payment of $1,500/month, total credit card payments of $175/month and a motorcycle payment of $375/month, when you add these monthly amounts together, the end result is your monthly debt/fixed expenses.
To establish a borrower’s debt-to-income ratio, divide their monthly debt payment by their monthly income. The end result is your debt-to-income ratio.
Monthly Income: $6,000
Total Monthly Debt Payment: $2,650
Debt to Income Ration = $2,650 / $6,000 = 44%
After the lender calculates the borrower’s debt-to-income ratio, it’s time to discover what the ratio is showing us. If a ratio of 10% to 20% or less, it means the borrower has an excellent debt-to-income ratio. This means that the borrower’s over-all monthly income is significantly higher than what they owe in outstanding debt.
That being said, if the borrower has a debt-to-income ratio of 35% to 39% or higher, it means that the borrower is taking on too much debt in relation to their income, in the eyes of most traditional lending institutions.
After the Sept 2008 banking crash and national capital freeze, anything over 35% to 39% is considered risky since it will be difficult to continue to cover your monthly debt obligations with your current income (pertaining to residential mortgage loans).
Prior to the 2008 banking melt-down the average accepted DTI was 45% to 55% (a huge difference).
Most lenders and banks are even more stringent when deciding a commercial mortgage loan which typically requires a 27% to 32% DTI according to most national chain-banks such as: Wells Fargo, Chase, etc.