Q: How do I calculate my debt-to-income ratio? Why is this important?

A: Your debt-to-income ratio can be calculated by dividing the total monthly payments of all of your debts by your gross monthly income. For example, if you had a mortgage payment of $850 (including insurance, property taxes, etc.), two car payments of $300 each, student loans of $100, and credit cards totaling $150 a month in minimum payments, your total monthly debts would be $1,400. If your monthly income were $5,000, then your debt-to-income ratio (DTI) would be $1,400 / $5,000, or 0.28.

Why is this important? Well, lenders look at your DTI as one of the most important factors, along with your credit rating, when determining whether they will offer you a loan, and if so, at what interest rate. Home lenders, in particular, look at what your DTI would be if they gave you a new mortgage, before deciding whether or not they will. Typically, lenders look for a "front-end" DTI of 0.28 or lower, and a "back-end" DTI of 0.36 or lower -- in this case, "front end" means strictly housing-related debts and expenses, and "back end" means housing debt plus all other debts.

So if your gross monthly income were $3,000, a lender would typically seek to get you a mortgage in which your monthly payment (including insurance and taxes) would be no more than $840 ($3,000 * 0.28 = $840), and after adding this $840 expense to your other debts, your total monthly debt payments could not exceed $1,080 ($3,000 * 0.36 = $1,080).

It's important to note that this calculation will not result in you getting lower interest rates. The higher your DTI, the higher your interest rate is likely to be. In order to make your loan conform to the 28/36 DTI standard, your mortgage would have to be for less money.

Other Financial Planning FAQ's Related Financial Planning Articles
Begin Online or Call 1-888-439-5454

Find the Right Debt Solution
Start With a FREE Debt Analysis

1. Which of these best describes why you are
    in debt?

2. What types of debt do you have?
    (please check all that apply)
img
Please Note: Unsecured debts are debts such as credit cards, personal loans, lines of credit, store cards, medical bills, and utility bills that are not secured by collateral. Mortgages and car loans are NOT considered unsecured debt.
Privacy Policy | Terms & Conditions | Sitemap | © 2004-2009 Triad Media Solutions, Inc. All Rights Reserved.