Most people can’t avoid debt when purchasing a new home, but you can minimize your debts by finding out whether or not you can afford a loan right now. You do this by calculating your debt to income ratio (DTI) which will help make sure you don’t get overwhelmed with debt. Here’s how:
Your monthly income is all of the money you make every month. Of course, if it is a payment that won’t be appearing on your tax return, it should not be considered a part of your monthly income.
Your monthly debts are a sum of all ongoing debt charges. This means, your credit card debt, loans of any kind, phone bills, insurance, car payments, etc. Anything that you have to continually contribute money to on a monthly basis for the next 6 months or more. If it is a debt that will be paid off within 6 months, you probably don’t need to include it.
Generally, your monthly debts + monthly housing expenses should not exceed 36% of your monthly income in order to be approved for a loan. You can use this link to help calculate your debt to income ratio
Now that you know roughly what will be coming in and out of your bank account, you can begin to consider whether or not a loan would be possible for you. Remember to leave room in your budget for unplanned expenses, like emergencies.