Tag: ratio

A healthy debt-to-income ratio is an indicator of financial stability. Just as the term implies, this ratio compares the amount of money you pay toward debt against your income.

A stable debt-to-income ratio is anything 43% and lower. Someone with a higher percentage may struggle to make ends meet and keep up with their payments.

When applying for a mortgage, lenders will use this number as a determining factor, so it’s essential to know where you stand. In most cases, you must have a debt-to-income ratio under 43% to get a qualified mortgage when buying a home.

Calculate debt-to-income ratio

The equation looks like this: Total monthly debt payments ÷ monthly gross income (before taxes) = debt-to-income ratio

Here’s an example: Let’s say you make $6000 each month before taxes, and you have an $1800 mortgage, $300 car payment, $150 student loans, and $50 credit card payment.

($1800 + $300 + $150 + $50) ÷ $6000 = debt-to-income ratio

$2300 ÷ $6000 = 0.38

Your debt to income ratio is 38%.

Bills as debt

*  Monthly rent or house payment

*  Auto, student, or other monthly loan payments

*  Monthly alimony or child support

*  Monthly credit card payment

*  Any other debt