The process of getting loans is famous for involving different figures which all but point to whether you are credit worthy as well as how much loan you can get. Aside from your credit scores, lenders will also calculate your debt-to-income (DTI) ratio.
DTI is percentage of your income that can comfortably towards paying your debt. Do not confuse debt-income ratio with credit utilization, which is ratio of your actual debts against your credit limits. DTI is important to lenders because it tells them how much more debt you can afford to pay after all your other debts have been paid.
Debt To Income Ratio FHA
You don't have to use a paid tool in calculating your DTI. You can do it yourself. Your DTI is equal to your monthly debt divided by your monthly income (monthly debt / monthly income = DTI). So the first step in determining your DTI is calculating how much money you spend every month on paying your debts. Start adding up the following as they apply to you: mortgage or rent, minimum credit card payments, car loan payments, student loans, alimony and/or child support payments, other loans.
The next thing you need to do is to calculate your monthly income. Add your yearly gross income, bonuses, overtime pay, alimony and/or child support, and other income. Divide the total by 12 to determine your monthly income. To calculate the DTI ratio, divide the monthly debt payments by the monthly income. Next, multiply the result by 100 to come up with a percentage result.
Your DTI result can be classified into the following:
36% or less
This is the healthiest DTI for majority of debt consumers. Avoid incurring more debt, or increase your income, to maintain a good ratio.
37%-42%
If your ratio is within this range, you should start reducing your debts.
43%-49%
This ratio indicates financial trouble. Start repaying your debts to prevent debt overload.
50% or more
This is a dangerous place to be, and this is where you should be very aggressive about paying off debts. Don't hesitate to ask for professional help if you so require.
Debt-To-Income Ratio - How Much Debt Can You Handle?