How to Calculate your Debt Ratio

In one of my previous posts about debt ratios, I talked about whether or not they're important in this day and age. What I didn't share was how to calculate your debt ratio. I'll discuss that today.

In mortgage lending, we look at two debt ratios; the front end and back end ratio. In the old days of manual underwriting, the rule was 28/36. This meant that your housing payment should not exceed 28% of your total gross income, and that your total monthly obligations including your housing payment should not exceed 36% of your total income.

Note that debt ratios take into consideration only your revolving and installment obligations, not your food and utilities.

So, how do you calculate your debt ratio? If you have a mortgage loan now, follow these steps:

1. Determine your total Monthly Gross Income- example $3500


2. Calculate your total monthly housing expense- this includes your mortgage payment, real estate taxes and homeowners insurance. If your taxes and insurance aren't escrowed, then you need to figure out what they cost on a monthly basis and add that amount to your mortgage loan payment. To do this, simply add your annual real estate bill(s) to your annual homeowners insurance premium and divide by twelve. Add the result to your mortgage payment. For example:




• Annual Real Estate tax of $4000 + Homeowners of $800 = $4800/12= $400


• $400 plus your mortgage payment of $700 = $1100


3. Your front end ratio is calculated by dividing your total housing of $1100 into your total income of $3500. The front end or housing ratio in this example is 27.5%


4. Now, to determine your back end ratio, add up all of your monthly obligations, i.e. car payment, boat payment, credit card payments, etc. and add the total to your total housing of $1100. For example:




• Car Payment- $200


• Credit Cards- $140


5. Divide your total expenses (including housing) into your total income to arrive at your back end or total debt ratio. In this example the total expense is $1440, divided into the total income of $4000, for a total debt ratio of 36%