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Payment-based ratio
For monthly budgeting, compare the required monthly loan payment with gross monthly income.
Payment-to-income ratio = monthly loan payment ÷ gross monthly income × 100%
Worked example
A $500 monthly loan payment on $5,000 gross monthly income equals 10%.
Do not confuse payment-to-income with balance-to-income
Some analyses compare total debt balance with annual income, while monthly affordability often focuses on monthly required payments. State clearly which ratio you are using.
Common mistakes
- Comparing a monthly payment with annual income.
- Mixing total balance and monthly payment ratios.
- Assuming a single ratio captures all debt risk.
Frequently asked questions
What is loan-to-income ratio?
The term can refer to comparing loan obligations with income; for monthly budgeting, payment-to-income is often more directly useful.
Should I include other debts?
Use a debt-to-income calculation when you want to include all recurring debt payments.
Does a low ratio guarantee approval?
No. Underwriting uses multiple factors.