How Does the Debt to Income Ratio Affect Your Home Loan?

Your debt-to-income ratio is a measure of risk. Creditors want to know that you'll be able to pay them back in a timely and consistent fashion. If you're overburdened by consumer debt or other obligations, they worry that you may not be able to make good on your mortgage promise. A debt-to-income ratio is just that -- a statistical measure of how much money you owe to various creditors, agencies, and bill collectors divided by how much money you bring in on a gross monthly basis.

Standard lenders will countenance debt-to-income ratios of approximately 28 percent for your housing expenses and 36 percent for your total recurring debt obligations. The debt-to-income ratio is also meant to prevent homeowners from “biting off more than they can chew” and thus getting themselves into potentially sticky credit situations down the line.

Are there exceptions to this 28/36 rule? Yes -- the Federal Housing Administration offers a loan package with a 29/41 acceptable load. You may also be able to find special arrangements with lenders which allow you to continuance higher debt loads over the short term. However, be mindful of two things.

If your ratio gets higher than the standard allotment, you are going to be depending a lot on a consistent income stream to keep you in the black. In addition, just because you can get around a debt-to-income ratio restriction doesn't mean that you should necessarily do so. After all, these ratios are put into place in part to help consumers avoid overspending.

You should also remember that just because your debt-to-income ratio is reasonable doesn't mean that you'll necessarily qualify for a loan. It simply means that you've passed one of the many hurdles to pre-approval. If you think your current debt-to-income ratio is too high, you might try to budget down some of your recurring debt.

See if you can amortize your student loan payments over a longer period, for instance. Trade in an expensive car to reduce your monthly car loans. Get rid of credit card debt by saving or borrowing from liquid assets. Or, simply shop in an area that doesn't require the payment of excessive homeowners' dues and property taxes.