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Debt-to-Income Ratio
Debt-to-income ratio is a measure of gauging financial stability.
Lenders look at this financial ratio when they consider extending
credit. A high debt-to-income ratio jeopardizes chances of making
major purchases, such as a car or a home. Maintaining a low debt-to-income
ratio, along with a good credit history, will help you to qualify
for the lowest interest rates and best terms.
The debt-to-income ratio is represented as a percentage. There
are two methods of determining debt-to-income ratios. The first
method is to compare net monthly income vs. debt. The second,
and more widely used method, compares gross monthly income vs.
debt. For the purposes of this section we will be referencing
the second method, which is the gross monthly income vs. debt.
How to calculate your debt-to-income ratio?
The first step in calculating your debt-to-income ratio is to
assess your gross (before taxes) monthly income. Some people have
additional income besides their pay.
Some examples of additional income are:
• Regular income from alimony and child support.
• Bonuses, commissions and tips (approximate values.)
• Dividends and interest earnings.
• Government benefits and/or assistance
Next, list the current minimum payments on all credit cards and
loans (except mortgage).
Be sure to include:
• Car payments
• Installment loan payments
• Bank/credit union loans
• Student loan payments
• Credit lines
Debt-to-Income Ratio is the total debt payments divided
by gross monthly income.
Example:
Total debt payments = $700
Gross monthly income = $3,200
Debt-to-Income Ratio = $700 / $3,200 = 22%
What is an acceptable debt-to-income ratio?
Generally speaking, the lower a debt-to-income ratio is, the
better your financial condition.
10% or less: Shouldn't have trouble getting
loans. Might even qualify for lower rates.
11% to 20%: Shouldn't have trouble getting loans,
but should start reducing spending.
21% to 35%: Although you may not have trouble
getting new credit cards, you are spending too much of your monthly
income on debt repayment.
36% to 50%: You may still qualify for certain
loans, however it will be at higher rates. It is time to develop
a plan to get out of debt.
More than 50%: Very difficult to qualify for
financing. You need to seek fiancial advice immediately.
NOTE: All answers are providing the consumers FICO score is above
700.
We created this page to provide accurate and authoritative information
in regard to debt-to-income ratios. If legal advice or other expert
assistance is required, the services of a competent professional
should be sought. All information is deemed accurate and reliable
at time of this release.
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