How to calculate the ratio of debt to income
November 20th, 2009 - By admin - Posted in Personal FinanceTwo major components of monitoring where you stand financially can be decomposed into your income and debt levels. Obviously, you would like to have more income from debt payments to leave, but even if you make more money than you owe, how can you tell if it good enough? Here the ratio of debt to income can be useful. This rough calculation can give you an idea of where you stand and can be useful in helping you to other financial decisions as listed how much money you can borrow to buy a house.
Ratios as a litmus test of financial
Financial ratios do not give a terribly detailed your financial situation, but they can be used to quickly assess how you’re doing. In addition to the debt to income ratio is another easy to calculate your net worth. With the net value that you add the bulk of your assets and measure them against all your debts. A positive number means you have more assets than liabilities, while a negative number means you have more liabilities than assets. This number can help you track your financial progress from year to year.
Not only the calculation of net useful, but your debt / income can come very useful. In fact, it is still used by many lenders to determine whether or not to extend funding if you apply for a loan. If you have a head start and already know what your ratio of debt to income, you’ll be better prepared to find the loan that suits you.
Calculating your debt / income
Calculating your debt to income is as simple as adding all your debts and deducting your income. May exclude certain calculations of things like mortgage payments and property taxes, but to really get a full picture it is best to include everything.
So to begin, take a moment to collect all your monthly debts. This includes monthly payments such as:
- The mortgage payment (including taxes, insurance, private mortgage insurance, etc.)
- Car payment
- Minimum payment by credit card
- The student loan payment
- Child support
- Other debt per month
When you add all these up it will give you your total monthly payments on debts. Keep this number handy, as we will use it in minutes.
Then you must calculate your monthly income. Start with your monthly salary. If you receive an additional bonus on a quarterly or annual basis, be sure to share the number for the month. Finally, we add the additional income you receive, whether in the form of dividends, a firm hand, or whatever the case may be. Overall, these all up and you’ll have your total monthly income.
Now comes the easy part. To determine your debt to income simply take your total debt payment and divide by your total monthly income. This is equivalent to your debt / income. For example, if you came up with a total of $ 2000 debt payments and monthly income of $ 6,000, that leaves you with a debt / income of 33%.
Why debt to income is important
So you have calculated your debt / income, but what that number means? Obviously, this is an issue that you want to be as low as possible. Debt, the less you have over your income, you are better financially because you have extra money to apply toward other goals. But it is also important in terms of deciding how much house you can afford.
Lenders tend to look at two key debt to income rates when it comes to mortgages. First, they look at the ratio of the front, which is the ratio of debt to income includes all housing costs. Then it is to reduce this ratio, which is interested in your non-mortgage debt relative to income. Generally, lenders like to see your front ratio to 36% or less, and your ratio back to 28% or less.
Keep in mind that these ratios are only guidelines and there are many other factors that help determine how much you can borrow and at what rate. But if you want a general idea of what might be expected, you can play with these numbers to see where you are and how you can improve your situation.
Leave a Reply