Monthly Debt-to-Income Ratio

Found This Helpful

Your monthly debt-to-income ratio consists of your recurring monthly debt payments shown as a percentage of your gross monthly income. Whenever you apply for a loan or other form of credit, lenders check your DTI ratio to verify that you can afford to make payments on the credit product you are applying for.

Debt

  • Lenders normally include only debts that typically take longer than six months to pay off when calculating your DTI ratio, such as your mortgage, car loan and credit card payments. Car leases are included in the equation, as are property taxes and homeowners insurance payments. Utility bills, life insurance premiums and other recurring bills are not included in your DTI. Lenders calculate both your current debt level and the level you would have if you established a new credit account.

Debt Level

  • Generally, lenders prefer borrowers to have DTI ratios of 36 percent or less. However, if you are applying for a home loan, you can qualify if you have a DTI ratio of up to 43 percent. Lenders do limit the amount of your income that can go to your mortgage payment, though, and typically your monthly payment, including escrow, cannot exceed 31 percent. Therefore, lenders expect that no more than 30 or 40 percent of your income should go toward covering debt so you still have 60 or 70 percent of your income to cover taxes, health care and daily expenses.

Income

  • Lenders only include recurring income when calculating your DTI ratio. This part of the equation consists of regular income such as your salary, Social Security income, pension payments and alimony. If you are self-employed and have an income that varies over time, you must provide the lender with two years of your tax returns to prove you have consistent income over long periods, even if it fluctuates from month to month.

Debt-to-Income Ratio's Purpose

  • Monthly debt-to-income ratios serve two purposes. They enable lenders to limit the availability of credit to people in no position to repay the debt, and the ratios also protect consumers from taking on more debt than they can handle. If you buy a new home and a new car within a short space of time, it may take several months before you settle into a routine where you are comfortable with the new debt. Your DTI ratio helps you to see when you are at your maximum debt level long before you get in over your head in debt.

References

Comments

Resources

You May Also Like

Featured

Read Article

West Elm Hacks to Get the Look for Less