The debt-to-income ratio helps determine the maximum amount that lenders are willing to lend to you.
Debt is everything that you currently owe including credit cards (food, entertainment, transportation, health care), car payments, and student loans.
Income is the gross income amount before taxes including salary, investment income, and royalties.
The 43% rule is that lenders prefer your debt-to-income ratio to be below 43%. If your gross annual income is $100,000 then the bank prefers to lend you an amount that maintains your debt under 43% of the gross annual income.
Use the sample table below to estimate how much the lender is willing to lend you to cap out at the 43% rule.
|Gross annual income:||$100,000|
|Gross annual income x 43%||$43,000||Max yearly debt overall|
|Gross monthly income:||$8,300|
|Gross monthly income x 43%||$3569||Max monthly debt overall|
As a smart home buyer, it is better to rely on net income (actual take home pay after taxes) instead of gross income to get a complete picture of how much debt you can handle before taking on a loan that may be bigger than you can manage.