Bank of America, keeping your debt at a manageable level is a requirement of good financial health. Your debt-to- income ratio compares your monthly debt expenses to your monthly gross income. To calculate your ratio, add up the payments you make toward debt during a month. That includes your monthly credit card payments, car loans, other debts (such as payday loans or investment loans) and housing expenses — either rent or the costs for your mortgage principal, plus interest, property taxes and insurance (PITI — Principal, Interest, Tax, and Insurance) and any homeowner association fees. Next, divide your monthly debt payments by your monthly gross income — your income before taxes are deducted — to get your ratio. (Your ratio is often multiplied by 100 to show it as a percentage.) For example, if you pay $400 on credit cards, $200 on car loans and $7,400 in rent, your total monthly debt commitment is $8,000. If you make $300,000 a year, your monthly gross income is $300,000 divided by 12 months, or $25,000. Your debt-to- income ratio is $8,000 divided by $25,000, which works out to 0.32, or 32 percent. While the preferred maximum varies from lender to lender, it’s often around 36 percent. • Beware of applying for credit. You want your credit score as high as possible when applying for a mortgage. Thus, you should try to avoid getting more credit, especially when your underwriter is deciding on your mortgage. Every credit application you fill out during this time could lead to an inquiry that might significantly decrease your score. • Keep your credit clean before purchasing a home. When it comes to your credit and purchasing a home, you must
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