A car payment, however, can not, so be sure to include that amount in
your total monthly debt payment. Anything that is a payment for a
monthly service or one-time expense does not need to be considered when
establishing your debt-to-income ratio.
Example of Debt-to-Income
If you make $4,000/month, this is your monthly income. If you have a car
payment of $400/month and a house payment of $1,200/month, and a boat
payment of $250/month, when you add these monthly amounts together, the
end result is your monthly debt/fixed expenses.
To establish your debt-to-income ratio, divide your monthly debt payment
by your monthly income. The end result is your debt-to-income ratio.
Monthly income: $4,000 Monthly debt payment: $1,850 Debt-to-income
ratio: $1,850/$4,000 = 46%
After you calculate your debt-to-income ratio, it's time to discover
what your ratio is telling you. If you have a ratio of 10% or less, it
means you have a great debt-to-income ratio, meaning your income is
significantly more than what you owe. However, if you have a
debt-to-income ratio of 55% or higher, it means you are taking on too
much debt in relation to your income - anything over 55% is considered
very risky since it will be difficult to continue to cover your monthly
debt obligations with your current income.
Debt-to-Income Ratio and Lenders
Lenders calculate and analyze your debt-to-income ratio to determine the
size mortgage you can afford. In fact, your DTI and your loan-to-value
(LTV) are frequently the most important numbers that lenders look at
when quoting you a mortgage amount and interest rate.
So as you can see, your debt-to-income ratio can tell you a lot about
your debt and your chances of qualifying for a mortgage loan. So in the
end, the best thing to do is to keep your debt under control and not to
take on too much debt. It could hinder your ability to qualify for a
mortgage and send your finances plummeting.
