For many, buying a home in the District of Columbia requires some financial acrobatics. After all, according to Zillow, the median price for a home in the metro area is currently $641,121. If you have a good credit score, though, securing a mortgage may be possible.
Credit bureaus have a somewhat secretive approach to calculating personal credit scores. All of them, however, consider an individual’s debt-to-income ratio. This percentage is simply how much you owe relative to your income.
An easy calculation
If you do not already know it, you can quickly and easily calculate your debt-to-income ratio. First, add all your monthly expenses together. Include everything you pay every month, such as the following:
- Mortgage, rent or other housing expenses
- Utilities and transportation costs
- Food, clothing and other personal expenses
- Car, student and other loans
- Credit card payments
- Any other monthly expenditures
After you add up your monthly expenses, determine your gross monthly income. This amount, which likely appears on your W-2 form and paystubs, is simply how much you make before taxes. Then, divide your monthly debt by your gross monthly income, move the decimal two places to the right and add a percentage symbol.
The sweet spot
There is some debate about what makes a debt-to-income ratio too high. The U.S. Consumer Financial Protection Bureau notes that any ratio above 43% may make it difficult to secure a mortgage or otherwise arrange financing for a home.
If you decide you have too much debt relative to your income, you may want to consider bankruptcy or other options. Nevertheless, the sweet spot for your debt-to-income ratio likely depends on your financial goals.
