Your debt-to-income ratio is a widely accepted way of measuring how deep into
debt you are. Many lenders use it as a factor in the pre-approval process of
getting a loan. The ratio compares the amount of income coming in to the types
and amount of debt you have.
The Two Sides
- The front ratio compares your income to your monthly housing costs (this
would simply be rent, or includes all the costs associated with your mortgage:
property taxes, hazard insurance, and homeowner's association dues, etc.).
- The back ratio includes the costs of the front ratio, plus all other
recurring debt (credit cards, personal loan payments, car payments, student loan
payments, alimony, child support, etc.)
Your DTI is then
represented by front ratio (f) over back ratio (b): f/b.
How It's Calculated
DTI is based on gross household
and monthly debt payments. The first thing you have to do is
divide your yearly income by twelve. For example, if your yearly income is
$33,000 dollars, your monthly income (33,000/12) is $2,750.
monthly housing costs total $500 (you rent an apartment). Your front ratio
(500/2,750) is expressed as a percentage.
500/2,750 = .18 = 18
The back ratio follows the same rules.
Combine your housing costs ($500) with all your other recurring debt. These are
monthly fixed expenses, that is, ones that will not be paid off in a few months.
For example, if you have school loan ($210), credit card ($43), and car ($189)
210+43+189+500 = 942
942/2,750 = .34 = 34
DTI = 18/34
What Does It Mean?
The back ratio is probably the most important
and commonly utilized part of your DTI, but the two together may have a bearing
on certain types of financing and loans. Generally, 28/36 is the limit for
conventional financing. Anything higher than that makes you a high-risk
borrower. 36 as a back ratio is more or less considered high debt, but,
depending on whom you talk to, anything above 20 could be considered high or
nearing dangerous territory. You can still get loans with a back ratio of over
36, but they would probably have to be through a government program of some
If you are wondering if you should consolidate your debt, your
debt-to-income ratio can tell you a little bit about your current financial
standing. It can also tell you the likelihood of your being able to acquire a second
equity line of credit
, personal loan, or other method of consolidation.
Staying aware of your debt-to-income ratio can warn you against future financial
trouble, so keep an eye on it!