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Full confession…I never knew what a debt-to-income ratio was until recently. Not sure why that is…maybe it is because I have no debt. And, as retired people, our income is on the lower scale of incomes. PLUS, I am not trying to buy any new purchases that are large.

So, when I heard that statement for the first time I had to look it up.

This is what Debt-to-Income Ratio (DTI) means:

Your debt-to-income ratio is all of your monthly debt payments divided by your gross income.
Simple enough right?

In case you are like me, and need to see it in action…here is an example:

Your mortgage is $1800. You have a car payment of $250, and a school loan payment of $300. For a total debt of $2350 a month.

Your gross income (before taxes, insurance and anything else is taken out of your paycheck) is $6000 a month.

Divide your debts ($2350) by your gross income ($6000) and you have a 39.2% debt-to-income ratio.

Ok – so why should you even care?

If you are looking to buy a house, many mortgage loan studies have shown that borrowers with a higher debt-to-income ratio are more likely to have trouble making their monthly payments. Lenders prefer to keep your DTI below 40%. That is the highest ratio a borrow can have and qualify for a mortgage.

What is the debt-to-income ratio range? Well, it really depends on who you talk to. Wells Fargo says that the ideal debt-to-income ratio is 28%. And that the high end, including all expenses, is 36% or lower.

If your DTI is on the high side…you need to pay off your debts before you can qualify for a mortgage and buy a house. Please take a minute and read ‘Saving To Buy A House‘.

Not sure how to even begin paying off your debts? Check out:

You may want to read all of the other articles about Budgets and Money too.

Buying a home is an exciting thing to do. It is also a large expense and commitment. There is nothing worse than not having enough money to pay your bills. Let alone a mortgage that you locked yourself into for 30 years.

Just like the tortoise and the hare. Steady plodding wins the race, right?

Question – How do you eat an elephant?‘ Answer – ‘One bite at at time'.'

So start paying off those bills. I know you can do it…and once you do – send me a picture of your first house. I would love to see it.