What Is a Debt-to-Income Ratio for Buying a Home in Virginia?

What is a debt-to-income ratio, and why does a lender ask about it?
It is your monthly debt payments divided by your gross monthly income. Lenders use it to see how well you can handle the payments on money you want to borrow. It is one of the first numbers to know before you shop for a home.

The Mike Webb Team (Mike and Claudia Webb, RE/MAX Allegiance) helps homeowners in Arlington, Northern Virginia, Maryland, and Washington, DC get their homes ready to sell and sold.

The Consumer Financial Protection Bureau (CFPB) gives these steps. First, add up all your monthly debt payments. Second, find your gross monthly income, which is generally your pay before taxes and other deductions. Third, divide the first number by the second. Source: CFPB, What is a debt-to-income ratio?.

The CFPB uses a $1,500 mortgage, a $100 auto loan, and $400 a month for the rest of the debts. That adds up to $2,000 a month. With a gross monthly income of $6,000, the ratio is 33 percent. Here is a second example of our own. Say your debts are $2,400 a month and your gross income is $8,000 a month. $2,400 divided by $8,000 is 0.30, or 30 percent.

Use the monthly payment on each debt you owe. The CFPB's example includes the mortgage, an auto loan, and other debts. Common ones to look for are:

• Your rent or mortgage payment, or the payment on the home you want to buy
• Car loan payments
• Student loan payments
• The minimum payment on each credit card
• Any other loan with a monthly payment

Ask your lender exactly which items it counts, because lenders and loan products can differ.

Yes. In the CFPB's example, the mortgage payment is part of the total. So when you plan a purchase, ask your lender to include the payment on the home you want, not just the debts you have today.

Try our second example again with one change. If your gross income stays at $8,000 a month and you pay off a $300 monthly car loan, your debts drop from $2,400 to $2,100. $2,100 divided by $8,000 is about 0.26, or 26 percent. Paying off a debt lowers the first number, and a raise or a second income raises the bottom number. Either one lowers your ratio. That math is ours, and it shows how the CFPB's steps work.

Here is a third example of our own. Say you keep $400 a month in other debts and plan a new mortgage payment of $2,600 a month, with the same $8,000 gross monthly income. $400 plus $2,600 is $3,000. $3,000 divided by $8,000 is 0.375, or 37.5 percent. Compare that with the 5 percent you may have today if you only owe $400. The new payment changes the ratio more than anything else, which is why lenders count it.

The CFPB says gross monthly income is generally what you earned before taxes and other deductions. Ask your lender which kinds of income it counts, such as bonuses or income from a second job, and what papers it needs to show them. Lenders can differ on this.

No. The CFPB says different loan products and lenders have different limits. Ask your lender which limit applies to the loan you are considering. A lender saying yes does not always mean the payment feels comfortable for you, so decide what monthly amount works for your life.

Write down every monthly debt payment and your gross monthly income, and work out your ratio. A HUD-approved counselor can also give advice on buying a home. You can search by ZIP code with the CFPB's Find a Housing Counselor tool, which lists agencies approved by HUD. Then read How to Get Pre-Approved to Buy in Arlington VA, What Credit Score Do You Need to Buy a Home in Virginia? and First-Time Home Buyer Steps in Arlington VA.

• A list of every monthly debt payment, with the balance and the lender's name
• Your gross monthly income, from your pay stubs
• Your questions about which debt limit applies to the loan you want
• The monthly amount you would be comfortable paying for housing

• How to Get Pre-Approved to Buy in Arlington VA
• What Credit Score Do You Need to Buy a Home in Virginia?
• First-Time Home Buyer Steps in Arlington VA
• Buyer Closing Costs in Virginia Explained
• Buy a Home in Arlington With 3 Percent Down

Is gross income the same as take-home pay?
No. Gross income is your pay before taxes and other deductions, as the CFPB explains.

Does the ratio decide whether I get a loan?
It is one thing lenders look at. They may look at other things too, and each lender sets its own rules.

Should I talk to you or a lender first?
Start with a lender to learn what you can borrow. Then call us, and we will help you plan your search.

Call or text Claudia at 703-350-3884 or visit claudiawebb.com.

The Mike Webb Team, RE/MAX Allegiance. Arlington, Virginia. Equal Housing Opportunity.