When you apply for a mortgage, lenders look at a range of factors to determine whether or not to issue you a loan. Of course, your credit score plays a big role, but lenders also want to make sure you have enough income to make the monthly payments on your mortgage and any other debts you have. If you are applying for a mortgage backed by the United States Department of Agriculture, your PITI ratio must be less than 29 percent, and your total debt ratio must be less than 41 percent. You must satisfy both ratios to be approved.
To calculate the income necessary to meet the PITI ratio requirement, add the costs of your mortgage's principal and interest payments, taxes and insurances and then divide that value by 0.29. To calculate the income to meet the total debt ratio requirement, you add all your monthly housing expenses plus other monthly debt obligations and then divide that figure by 0.41.
Calculating the PITI Ratio
The PITI (principal, interest, taxes and insurances) ratio measures how much of your monthly income will go toward your monthly housing expenses. To calculate the ratio, first add up all of the principal and interest payments on your mortgage, hazard insurance, real estate taxes, monthly escrow amounts for annual fees, homeowners association dues and assessments, flood insurance premiums and special assessments. Second, divide that total by 0.29 to find the minimum amount of monthly income you need to qualify for the mortgage.
For example, say the home in which you are interested would require a monthly mortgage payment of $850, monthly hazard insurance premiums of $80, real estate taxes of $95 and homeowners association dues of $45. The total of your monthly costs is $1,070. Divide $1,070 by 0.29 to find that you need at least $3,689.66 to qualify for a mortgage that caps the PITI ratio at 29 percent.
Calculating the Total Debt Ratio
Your total debt ratio measures how much of your monthly income goes toward all of your debt payments, including your home expenses.
To calculate the minimum income you need to meet the 41 percent cap on the total debt ratio, start with your monthly housing expenses calculated for the PITI ratio and add any other monthly debt obligations. These include any installment loans that will continue for 10 months or more, such as car loans, student loans, child support and alimony obligations. Also include the minimum monthly payment on any revolving accounts, such as credit cards. Then, divide the total by 0.41 to find the minimum income you need each month to qualify for the loan.
For example, if in addition to the $1,070 of housing expenses you also have a $250 student loan payment and a $200 car payment, your total debt expenses each month equal $1,520. Then, divide $1,520 by 0.41 to find that you need at least $3,707.32 in monthly income to meet the 41 cap on the total debt ratio.