A Lender’s Take on Debt-to-Income Ratios

Debt-to-income ratios seem to generate many questions from borrowers. If you have questions on this subject, the information below may help answer them.


As well as the mortgage payments you are hoping to take on in purchasing or refinancing your home, your revolving and installment debt represent the greatest concerns to lenders. These include such items as car and credit card payments, as well as other types of loans, if you have them.

Note that lenders usually aren’t concerned about things like gas bills and bills for food and clothing, unless you’re applying for some types of VA loans.


The income that lenders use in their calculations is gross income. This is what you make before any taxes are withdrawn. You will be asked to show two years of income documentation, meaning: full tax returns, W-2 forms, and up to two months of your recent pay stubs.

If you are either self-employed or in a commissioned position, you will have to be able to demonstrate two years of history in that job. If you have previously received a base salary, but have recently begun to receive commissions, these commissions will be prorated over a two-year period.

The Ratio

Your debt-to-income ratio can be found by dividing all your debt by your income. For example, if you make $4,000 per month, and the debt you carry, as described above, totals $1,500 per month, your debt-to-income ratio is $1,500/$4,000, or 37.5 percent. Ideally, your lender would like your ratio to be in the 40 percent range, or lower. In fact, the lower, the better.

In the long term, events such as adding a new family member and changing your employment status can affect your income, and therefore your debt-to-income ratio. These are important items to factor in when considering how much home to buy. Discuss any concerns with your mortgage professional.

How Do the Newly Implemented QM Rules Affect You?

In January this year, the federal government implemented its latest set of rules aimed at combating fraud in the mortgage industry. Will they affect you, and if so, how?

Introduced a year ago, these are called Qualified Mortgage (QM) rules, and they’re designed to provide lenders with a high level of assurance that borrowers who are financing a home are sufficiently qualified to meet their payment schedules.

As lenders sell most mortgages after closing to investors through Fannie Mae and Freddie Mac, QM rules are really about proving to Fannie and Freddie that you are a solid borrower.

While these rules have no impact on your ability to qualify for a mortgage, they will ramp up the amount of documentation that you will be asked to provide. Expect to deliver, at a minimum, two full years of tax returns, 30 plus days of pay stubs, and bank statements for any account you plan on using in the transaction.

These documentation requirements will likely have the greatest impact on self-employed borrowers, as they usually are required to present more paperwork than salaried or hourly employees.

For mortgages that fall outside of the traditional 15 or 30-year mortgages – such as interest-only loans, for example – there will be non-QM programs that allow lenders to retain these mortgages in-house. You would still have to qualify for these mortgages using the same guidelines, but instead of being sold to investors, they would be held by the lender and still undergo a very high level of scrutiny.