Is Debt to Income Calculated Using Gross Monthly Income or Net Monthly Income?

Being in debt is as American as baseball and apple pie. At least 69 percent of Americans carried some debt as of 2011, according to the USA Today website. Even if you're debt-free, there might come a time when you'll need to borrow money -- for example, if you want to buy a home. Your lender will probably perform a debt-to-income calculation to determine how much debt you can afford.

Gross Income

Lenders calculate your debt-to-income ratio using your gross monthly income, the amount of money you make before taxes are withheld. It includes income from all sources, including investment income, self-employment income, wages, tips, child support and pensions. If you're married, and both you and your spouse will be responsible for the loan, you can add your spouse's monthly gross to your income to determine your total monthly gross income.

Minimum Debt

Your minimum debt is the amount you are obligated to pay each month. It includes your mortgage or rent payment, credit cards, student loans, car payments, child support payments, homeowner association fees and any other monthly debt obligations. It does not include taxes withheld from your paycheck or your living expenses, such as clothing, groceries, utilities or entertainment. Only the minimum payment is considered, even if you regularly make higher payments.

Debt-To-Income Ratio

Lenders determine your debt-to-income ratio by dividing your total monthly minimum debt by your total gross income. For example, if your debt is $1,000 per month and your gross monthly income is $4,000, your DTI ratio would be 25 percent. Your mortgage lender typically considers both your front-end debt, which is your housing expenses, including principal, interest, property taxes, and your back-end debt, which includes all of your current debt payments plus your proposed loan payments.

Acceptable DTI Ratio

Each lender maintains its own standards for how much debt a potential borrower can handle. A general rule of thumb for acceptable debt is a 28 percent front-end DTI and a 36 percent back-end ratio, according to the National Association of Realtors. Home loans obtained through the Department of Veterans Affairs or the Federal Housing Administration allow slightly higher ratios. Both agencies allow borrowers to qualify with a back-end DTI ratio of up to 41 percent.

Photo Credits

  • Jupiterimages/Brand X Pictures/Getty Images

About the Author

Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.

Zacks Investment Research

is an A+ Rated BBB

Accredited Business.