How to Compute the Debt to Income Ratio
If you have ever applied for a mortgage or an auto loan, you've probably heard the phrase "debt to income ratio." This term is simple to understand, best summed up by the following statement: The percentage of your monthly income expended to pay monthly debt obligations. Learning to compute your debt to income ratio is simple. You don't need a fancy calculator or financial program.
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Instructions
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Add up your total monthly gross (pre-tax) income. If you want to compute your household debt to income ratio, add your spouse's income. Include any steady income from child support, alimony, investments, and other sources.
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Figure your total monthly debt load. Add up your minimum monthly credit card payments, mortgage, auto loan payments, student loan payments, and any additional monthly debt expenses. Do not add variables such as utility bills, clothing, groceries, or entertainment.
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Divide your monthly debt load by your total gross income to compute your debt to income ratio. If your monthly debt load is $2000, and your gross monthly income is $6000, your debt to income ratio would be 33 percent (2000/6000=.33).
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Tips & Warnings
Most lenders, whether mortgage lenders or other types of creditors, prefer your debt to income ratio to be no higher than the low- to mid-30 percent range. Each bank or institution, however, may have different standards and requirements.
