If you are planning to refinance your home, get your first mortgage, or apply for any other type of consumer credit, 
your housing and debt-income ratios will be tightly scrutinized by lenders. In brief, these ratios will determine if you can afford to repay your loan.
The housing ratio is calculated by dividing monthly housing expenses by your gross monthly income. As a basic rule, the housing ratio should not exceed 28%. These expenses include: mortgage payment, home insurance, association fees, private mortgage insurance, and any other charges you are required to pay back on a monthly basis. Your income can include the following: wages from job, interest income, alimony, social security or other government pay out, and a variety of other income producing sources.
The debt-to-income ratio is calculated by dividing your fixed monthly expenses by your gross monthly income. As a basic rule, the debt ratio should not exceed 36%. Your fixed monthly expenses include: monthly installment loans, housing expenses, monthly revolving loan payments, alimony/child support, legal obligations, and more.
Before applying for a mortgage, experts strongly encourage you to obtain copies of your credit reports to make sure that they are free of erroneous or outdated information. These reports weigh heavily in determining creditworthiness and validating your lending ratios.
Both ratios are used to determine what you can borrow after your down payment amount has been taken into consideration. Use this loan-to-value (LTV) calculator to determine what your down payment amount should be.
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