Why do you need to know this number ? Because lenders use it as a measuring stick of your ability to repay the money you have borrowed or to take on extra debt—such as a mortgage or a car loan. It ‘s besides a helpful phone number for you to know as you consider whether you want to make a big purchase in the first place. This article will walk you through the steps to take to determine your debt-to-income proportion .
Reading: Calculate Your Debt-to-Income Ratio
Key Takeaways
- To calculate your debt-to-income ratio (DTI), add up all of your monthly debt obligations, then divide the result by your gross (pre-tax) monthly income, and then multiply that number by 100 to get a percentage.
- Calculating your debt-to-income ratio before making a big purchase, such as a new home or car, helps you see whether or not you can afford it.
- Paying off debt, avoiding taking on new debt, and increasing your income are the only ways to lower your DTI.
How to Calculate Your DTI
To calculate your debt-to-income proportion, start by adding up all of your recurring monthly debts. Beyond your mortgage, other recurring debts to include are :
- Auto loans
- Student loans
- Minimum credit card payments
- Child support and alimony
- Any other monthly debt obligations
next, determine your crude ( pre-tax ) monthly income, including :
- Wages
- Salaries
- Tips and bonuses
- Pension
- Social Security
- Child support and alimony
- Any other additional income
now divide your total recurring monthly debt by your gross monthly income. The quotient will be a decimal ; multiply by 100 to express your debt-to-income proportion as a share .
Your debt-to-income proportion, along with your credit grudge, is one of the most important factors lenders consider when you apply for a loan.
Can You Afford That Big leverage ?
If you are considering a major acquisition, you should take into account the new purchase as you work out your debt-to-income ratio. You can be sure that any lender considering your application will do so .
You can use an on-line calculator, for example, to estimate the measure of the monthly mortgage requital or fresh car lend that you are considering .
Comparing your “ before ” and “ after ” debt-to-income proportion is a commodity way to help you determine whether you can handle that home purchase or new car right immediately .
When you pay off debt—a student lend or a credit card—recalculating your debt-to-income ratio shows how much you have improved your fiscal condition. For example, in most cases, lenders prefer to see a debt-to-income ratio smaller than 36 %, with no more than 28 % of that debt going towards servicing your mortgage. To get a qualify mortgage, your maximum debt-to-income proportion should be no higher than 43 %. Let ‘s see how that could translate into a real-life situation .
36%
Most lenders prefer to see a debt-to-income proportion of no higher than 36 %.
model of a DTI calculation
here ‘s a look at an model of a debt-to-income proportion calculation .
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Mary has the following recurring monthly debts :
- $1,000 mortgage
- $500 auto loan
- $200 student loan
- $200 minimum credit card payments
- $400 other monthly debt obligations
Mary ‘s total recurring monthly debt equals $ 2,300 .
She has the follow gross monthly income :
- $4,000 salary from her primary job
- $2,000 from her secondary job
Mary ‘s gross monthly income equals $ 6,000 .
Mary ‘s debt-to-income proportion is calculated by dividing her full recurring monthly debt ( $ 2,300 ) by her crying monthly income ( $ 6,000 ). The mathematics looks like this :
Debt-to-income proportion = $ 2,300 / $ 6,000 = 0.38
immediately multiply by 100 to express it as a share :
0.38 X 100 = 38 %
Mary ‘s debt-to-income proportion = 38 %
Less debt or a higher income would give Mary a lower, and consequently better, debt-to-income ratio. Say she manages to pay off her student and car loans, but her income stays the lapp. In that case the calculation would be :
full recurring monthly debt = $ 1,600
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Gross monthly income = $ 6,000
Mary ‘s newfangled debt-to-income proportion = $ 1,600 / $ 6,000 = 0.27 X 100 = 27 % .
