How to Calculate the Qualifying Ratio for a Home Loan

By DB Jenkins

Mortgage lenders use a variety of calculations to determine a particular borrower's ability to repay a loan. These ratios are calculated using total verified income, debt payments and mortgage interest rates. The main ratios used by lenders are: front-end debt-to-income ratio (DIR), total debt-to-income ratio (DIR) and disposable income (DI). Calculating these three ratios is rather easy.

Ask your lender what the qualifying ratios are for the loan for which you are applying. The lender will give you three specific numbers--two percentages (one for front-end DIR and one for total DIR) and one dollar figure. Most lenders require a front-end DIR to be below 30 percent, a total DIR to be less than 40 percent and a DI to be at least $1,000.

Calculate your front-end DIR. To do this, simply divide the proposed monthly payment for the mortgage by your total gross monthly income. This number represents the total percentage cost of just your mortgage payment. Do not include taxes or insurance in this calculation.

Calculate your total DIR. This represents the total percentage cost of all monthly obligations (excluding utilities, entertainment, food and clothing). To figure this percentage, divide the sum all monthly credit-reportable bills by your total gross income.

Calculate your DI. This dollar amount shows the lender how much income you have left over at the end of the month for food, clothing, entertainment and miscellaneous expenses. To calculate your DI, subtract the sum of all monthly credit-reportable bills by your total monthly net income.

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