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"Debt-to-Income Ratio"
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Article: "What is
Debt-To-Income Ratio"
By Andre Plessis
"Debt-to-Income Ratios and Car Payments"
The Debt To Income Ratio is one of the most important guideline you must meet if you want to qualify for a home loan.
When determining your ability to qualify for a mortgage, a lender looks at what is called your "debt-to-income" ratio. A debt-to-income ratio is the percentage of your gross monthly income (before taxes) that you spend on debt. This will include your monthly housing costs, including principal, interest, taxes, insurance, and homeowner’s association fees, if any. It will also include your monthly consumer debt, including credit cards, student loans, installment debt, and….…car payments.
How a New Car Payment Reduces Your Purchase Price
Let’s assume you earn $5,000 a month, your mortgage is $1,700, your student loan is $350 per month and the minimum payment on your credit cards is $350 per month.
YOUR MONTHLY DEBT IS $2,400. If you divide $2,400 by your monthly income $5,000 you obtain your DTI which is in this case 48%. If you buy a car and that your monthly payment is $550 then your debt load becomes $3,000 as we add $550 to $2,450. We divide $3,000 by $5,000 to find out your NEW DTI and we find 60% debt-to-income ratio. THAT IS NOT GOOD. In fact it will be hard to finance your home if your DTI is higher than 50 to 55%.Even if you feel you can afford the car payment, mortgage companies approve your mortgage based on their guidelines, not yours.
Whenever the thought of buying a car enters your mind, think ahead. Think about buying a home first or getting the loan to refinance your home. Buying a home is a much more important purchase when considering your future financial well being.
Do not buy the car. Buy the house first.
How To Calculate Your Debt To Income Ratio
 | STEP 1: Add up your total net monthly income. This includes your monthly wages and any overtime, commissions or bonuses that are guaranteed; plus alimony payment received, if applicable. If your income varies, figure the monthly average for the past two years. Include any monies earned from rentals or any other additional income. |
| STEP 2: Add up your monthly debt obligations. This includes all of your credit card bills, loan and mortgage payments. Make sure to include your monthly rent payments if you rent. |
| STEP 3: Divide your total monthly debt obligations by your total monthly income. This is your total debt-to-income ratio. |
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Debt To Income Ratio Calculation |
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Your Monthly Debt Payments |
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| Monthly mortgage payment (include property taxes and insurance) or your rent | $ |
| Monthly car loan payments | $ |
| Monthly student loan payments | $ |
| Monthly minimum credit card payments | $ |
| Other Personal Loans | $ |
| Monthly child support payments | $ |
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TOTAL MONTHLY DEBT PAYMENTS |
$ |
| Your Monthly Income | |
| Monthly gross income | $ |
| Annual bonuses and overtime, divided by 12 | $ |
| Other annual income, divided by 12 | $ |
| TOTAL MONTHLY INCOME (Unreported earned income cannot be used in the calculation) | $ |
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Your Debt To Income Ration (Should ALWAYS Be Under 50%) |
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| Total Monthly Debt Payments Divided by Total Monthly Income = Debt to Income Ratio | |
Lenders use your debt-to-income ratio (how much you owe on credit cards and loans compared with how much you earn) to help evaluate your creditworthiness.
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36% or less: This is a healthy debt load to carry for most people. 37%-42%: Not bad, but start paring debt now before you get in real trouble. 43%-49%: Financial difficulties are probably imminent unless you take immediate action. 50% or more: Get professional help to aggressively reduce debt. |
Andre Plessis
Andre Plessis
"The Mortgage Guru"
"A Mortgage Professional
whose primary goal is to provide the expertise, guidance and skills necessary to
obtain the best mortgage to meet your personal needs".
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P.S. If you are at all intimidated or unsure about the mortgage process if you don’t understand how to evaluate your options in getting a mortgage loan our 15 key questions will help you feel comfortable that you are making the best decisions. Also if you are in the process of refinancing your home with anyone, CALL ME and I will let you know if you are being offered the best loan option based on market conditions and your financial situation.
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