Debt to income ratio is an important factor when you want to find out how much of another loan or a mortgage you can borrow. Usually the lenders use this guideline in order to determine the maximum mortgage amount you can borrow. A debt to income ratio gives an idea about how much you have to pay on debt each month as opposed to the amount of your monthly income and thus determine how much of more debt you can handle. The debt to income ratio is basically the percentage of your gross monthly income before tax deduction that you use to pay your total monthly debt payments. Your debt to income ratio can be of two types, front end ratio and back end ratio. Read on to know about both in details.

Types of debt to income ratio:

  • Housing expense ratio – This is what we commonly refer to as front end ratio. It is the percentage of your monthly gross income before tax deduction that is used to pay your housing cost. The housing costs include principal amount, interest, mortgage insurance, homeowners’ insurance, taxes, and homeowners’ association fees if applicable.
  • Long term debt ratio – This is commonly referred to as back end ratio. This includes the percentage of your monthly gross income before tax deductions that you use to pay you monthly consumer debt. your consumer debt includes car payments, credit card debts, payday loans, installment loans and other such expenses. You should remember that your life insurance or auto insurance is not considered to be debt.

Usually the debt to income ratio is 33/38. This means that your housing costs can consume thirty-three percent of your monthly income. Now if you add you consumer debts to your monthly housing costs, then the total should not be more than thirty-eight percent of your monthly income to meet all these obligations.

How can you calculate debt to income ratio?

The debt to income ratio can be calculated using any debt to income ratio calculators that are found in different websites. However, you should choose a reputed website for such calculations to get accurate results. You need to feed data to the calculator as individual categories of your debt payments such as credit card payments, car loan and so on. You also need to include your individual housing payments and your gross monthly income. The calculator then computes your debt to income ratio and gives the value.

Thus you can see how important debt to income ratio is for lenders.

Similar Posts:

Share