How To Calculate Debt
Figuring out your DTI is a fairly simple process if you know how to do it. Heres how the debt-to-income ratio is calculated:
Total monthly debt payments/Gross monthly income x 100 = Debt-to-income ratio
In this formula, total monthly debt payments represent the total amount combined you pay to debt each month. So this includes payments to student loans, credit cards, car loans, personal loans, mortgages or any other debts you have.
Your gross monthly income is your income before taxes and other deductions are taken out. This is your total income from all sources, including a 9 to 5 job, a part-time job or second job, a side hustle and any payments you receive in the form of government benefits, child support or alimony.
So, heres an example of how to calculate your debt-to-income ratio:
First, youd add up all of your monthly debt payments. Remember, youre only looking at debts here, not other expenses such as utility bills or insurance.
Next, add up your gross monthly income. If you work a regular 9 to 5 you can find your gross pay listed on your pay stubs. If youre self-employed or do gig work, you may need to check your bank statements to see how much youve deposited.
Now, say you have total debt payments of $1,500 each month. Meanwhile, your total gross monthly income is $5,000. To find your DTI, youd divide $1,500 by $5,000 to get 0.3. Youd then multiply that by 100 to get your final debt-to-income ratio of 30%.
What Does My Debt To Credit Ratio Mean
Knowing how to calculate your debt to credit ratio is excellent, but its useless if you dont know what to do with this information.
Using the formula, youll get your debt to credit ratio in the form of a percentage. But what does this percentage mean?
Well, simply enough, this percentage is the portion of your available credit that you use. So, for example, if your debt to credit ratio is 40%, that means you utilize 40% of your credit limit.
Like I mentioned earlier, a good rule of thumb is to aim for a credit utilization rate of 30% or lower. When your ratio is higher than this, it not only lowers your credit score, but it can give lenders the impression that you are an irresponsible or high-risk borrower.
For business owners, this can hurt your chances of being approved for the financing you need to help grow your business.
If your debt to credit ratio is too high, you may need to work on lowering it before you apply for a business loan or choose a lender with more lenient requirements, like Camino Financial.
How Is Debt Consolidation Loan For High Debt To Income Ratio
Debt Consolidation Loans for High Debt-to-Income Ratios A debt consolidation loan allows you to scoop up some or all of your current loans and put them into one basket. This way, you only have to remember one loan payment per month, and your new monthly payment may be less than the sum of your current monthly payments.
What happens if you have too much debt to get a mortgage?
When you apply for a mortgage, the lender will make sure you can afford it. Doing so involves evaluating the relationship between your debts and your income formally called your debt-to-income ratio, or DTI. If your DTI is too high, you could have a hard time getting approved for a mortgage.
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What Is A Debt
Debt-to-income ratio is the ratio of total debt payments divided by gross income expressed as a percentage, usually on either a monthly or annual basis. As a quick example, if someone’s monthly income is $1,000 and they spend $480 on debt each month, their DTI ratio is 48%. If they had no debt, their ratio is 0%. There are different types of DTI ratios, some of which are explained in detail below.
There is a separate ratio called the credit utilization ratio that is often discussed along with DTI that works slightly differently. The debt-to-credit ratio is the percentage of how much a borrower owes compared to their credit limit and has an impact on their credit score the higher the percentage, the lower the credit score.
Why is it Important?
DTI is an important indicator of a person’s or a family’s debt level. Lenders use this figure to assess the risk of lending to them. Credit card issuers, loan companies, and car dealers can all use DTI to assess their risk of doing business with different people. A person with a high ratio is seen by lenders as someone that might not be able to repay what they owe.
There are two main types of DTI:
Front-End Ratio
Back-End Ratio
Why Your Dti Is So Important
First of all, it’s desirable to have as low a DTI figure as possible. After all, the less you owe relative to your income, the more money you have to apply toward other endeavors . It also means that you have some breathing room, and lenders hate to service consumers who are living on a tight budget and struggling to stay afloat.
But your DTI is also a crucial factor in figuring out how much house you can truly afford. When lenders evaluate your situation, they look at both the front ratio and the back ratio.
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What Factors Make Up A Dti Ratio
- Front-end ratio: also called the housing ratio, shows what percentage of your monthly gross income would go toward your housing expenses, including your monthly mortgage payment, property taxes, homeowners insurance and homeowners association dues.
- Back-end ratio: shows what portion of your income is needed to cover all of your monthly debt obligations, plus your mortgage payments and housing expenses. This includes credit card bills, car loans, child support, student loans and any other revolving debt that shows on your credit report.
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How To Calculate Your Debt To Income Ratio
To calculate the share of your income consumed by debt repayment, fill in the numbers in our easy-to-use debt-to-income ratio calculator.
Step 1: Total your gross monthly income
Include all income sources, including employment income, pension, support payments, and government assistance. If you are self-employed, include your gross business income net of operating expenses but before taxes and personal benefits.
My paycheque
Bank or other loan paymentsInstallment loans, rent-to-ownOther debt paymentsTOTAL MONTHLY DEBT PAYMENTS
We include both rent and mortgage payments in this calculation. Why? Because a mortgage is a critical component of many peoples debt problems, and to make the ratio comparable, those without a mortgage should substitute their monthly rent payment.
You may also want to add in monthly spousal support payments if these obligations take up a significant portion of your income.
Step 3: Now run this formula or click calculate
DTI = TOTAL MONTHLY DEBT PAYMENTS divided by TOTAL MONTHLY INCOME
For example, if your total monthly income was $2,800 and your debt payments totaled $1,200 then your debt-to-income ratio is:
$1,200 / $2,800 = 42%
What Is The Difference Between Debt
Both calculations evaluate your risk as a borrower, but consider different factors of your financial profile.
The DTI ratio considers your income and all monthly debt obligations to see how much money goes into paying off your debt. Lending institutions use the DTI ratio to evaluate borrowers, but it doesn’t impact your credit score.
The credit utilization rate is a key evaluating factor of your credit score. This calculation measures your credit usage by comparing your maximum credit limit to your outstanding balance. Unlike the DTI ratio, the credit utilization rate only considers revolving credit credit cards, personal credit lines and HELOCs. It doesn’t factor in installment debt or your monthly income.
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What Should You Do If You Have A High Debt To Income Ratio
For your own knowledge, you should at all times monitor your debt to income ratio. It is a part of good financial planning to have a tab on your finances. When your income rises or when you are considering the idea of availing a new loan, it is a good idea to re-check your debt-income ratio and assess your financial position.
If you notice that your Debt to Income Ratio is high then there are things you can do to lower it. You can:
- Postpone a purchase if it is not essential.
- Increase your EMI and pay off the loan quicker this will temporarily raise your debt-income ratio but make it lesser in the long run.
- Not take more debt until your ratio has stabilized to below 35%.
- Look for ways in which you can increase your income
- If possible, foreclosing any existing loans would also be a good idea.
Final Thoughts On How To Calculate Debt To Income Ratiofor Refinancing
Getting your DTI as low aspossible is a critical factor to get a mortgage refinance. If you are havingproblems getting approved, make sure you try the strategies we mention above.
Also, some lenders still may consider you if your DTI is 43% or higher. A smaller lender with assets under $2 billion must still look at your DTI, but they may approve you if your credit score is high enough.
The most important thing isto shop around. Try a few lenders to see if you can get approved for yourrefinance. Each lender has different requirements, so keep trying and you couldget a great rate on your mortgage refinance.
References
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Is 11% A Good Debt
10% or less: Shouldnt have trouble getting loans. May qualify for lower rates. 11% to 20%: Again, shouldnt have trouble getting loans.
Is 20% a good debt-to-income ratio?
A debt-to-income ratio of 20% or less is considered low. The Federal Reserve considers a DTI of 40% or more a sign of financial stress.
How Do I Calculate My Personal Debt Ratio
To calculate your debt-to-income ratio:
Recommended Reading: Consumer Debt Help Association
How To Reduce Your Debt
Here are few things to consider if you want to reduce your debt-to-income ratio or learn how to use credit wisely:
Avoid Taking On New Debt
Avoiding debt can help build your financial well-being, according to the CFPB. And because your DTI ratio depends on your amount of debt versus your income, taking on more debt without growing your income will increase your DTI ratio. So itâs a good idea to apply only for the credit you need and avoid taking on new debt.
Pay Down Existing Debt
There are a few different strategies for paying off debt. The CFPB talks about the snowball and highest-interest-rate methods. But there are many more strategies for handling loan paymentsâsuch as consolidating debtâthat you might explore, too.
Before you make any decisions, consider talking to a qualified financial professional to figure out a debt management plan for your specific situation. You might even have access to some financial planning services through your employer or retirement plan administrator.
Pay More Than the Minimum
The CFPB recommends paying more than the minimum payment on your credit cards whenever possible. This may help you reduce your credit card debt faster and minimize charges. It can also help your , which can be an important factor in calculating your credit scores.
Use a Budget
Tips For Improving Your Debt
In order to make things a bit easier for you, we have decided to include a few specific tips about things you can do to improve income and lower debts. As we mentioned, its all about lowering debts and raising income, but that is pretty broad, so here are some real-life examples that should help.
Rent Your Space or Items
If you own a home, one of the best ways you can help lower your DTI ratio is to rent out a room or area of your home. Most of the time, this could potentially cover most, if not all, of your mortgage payment, which is one of the most common reasons for a high DTI ratio. It would essentially be lowering your mortgage payment, which is always a good thing. In addition to that, you could also rent out items or things you own in order to get a bit more cash.
What is a rent-to-own home?
Pick Up a Second Job or Get a Higher Paying Main Job
Raising your income is one of the best ways to lower your DTI ratio. Of course, the first thing you could do is approach your boss about a raise. If they are unwilling, you can either look to get a job that is higher paying or simply find a second job to supplement your income.
Look At Making Some Money Online
Pay Off Your Debt More Quickly
Is it better to deal with debt or save your money? to find out.
Take a Long Look at Your Expenses
Check out our guide to automatic savings and automatic payments.
Look at Selling Your Car and Getting a Cheaper One
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How To Calculate Debt To Income Ratio
Okay easy enough, but your ratio is likely not as clear-cut as half your income . How do you calculate your exact DTI? Theres math involved, but thankfully its pretty basic .
Simply divide all your monthly debt payments by your gross income, and then multiply that number by 100. This will give you your DTI percentage.
In some cases, what constitutes income and debts is clear-cut. In other cases, not so much. Generally, lenders follow these guidelines for what to include for each.
Debt includes:
-
Minimum required credit card payments
Income includes:
-
Income from additional jobs or side hustles
-
Revenue from rental property or other investments
-
Regular income from annuities, trust funds, and retirement accounts
-
Any child support or alimony payments you receive
Lets look at a real-world example:
Auto loan: $350 per monthStudent loans: $220 per monthCredit cards: $130 minimum monthly paymentExpected housing costs: $1,800 per month= $2,500 monthly debt obligation
Monthly salary: 5,000 Monthly side-gig income: $1,500
x 100 = 38% DTI
The above scenario is for illustrative purposes only.
How Do You Calculate Your Debt
Divide monthly minimum debt payments by gross monthly income to calculate your debt-to-income ratio.
Simple math is all it takes to calculate this percentage. First, look at your paycheck and find your gross incomethe amount before taxes and deductions like insurance premiums and 401k contributions are taken out. If your income varies from month to month, you can instead use your average gross income for the last few months.
Next, add up your minimum monthly debt payments like your student loans, , child support, and rent or mortgage payments. Then, divide your monthly debt total by your gross monthly income. To convert to a percentage, multiply that by 100. Lets see the formula in action, with a gross monthly income of $7,000.
Minimum loan payments:
Loan payments divided by gross monthly income: $2,100 / $7,000 = 0.3
Percentage conversion: 0.3 x 100 = 30%
In this example, your debt-to-income ratio is 30%.
Its important to note that your debt-to-income ratio does not take into account other essentials like utilities, groceries, phone bills, or anything paid for in cash. For example, if you use a babysitter weekly, and pay him or her in cash, the expense will not be reflected in your debt-to-income ratio.
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Tips For Getting A Mortgage
- The debt-to-income ratio is just one of several metrics that mortgage lenders consider. They also look at your credit score. If your score is less-than-stellar, you can work on raising it over time. One way is always to pay your bills on time. Another is to make small purchases on your credit card and pay them off right away.
- If you cant get a mortgage for the amount you want, you may need to lower your sights for now. But that doesnt mean you cant have that dream home someday. To realize your housing hopes, consider hiring a financial advisor who can help you plan and invest for the future. Our matching tool will connect you with up to three advisors in your area.
Is 10% A Good Debt
Your debt-to-income ratio is an indicator of your overall financial health. The fewer repayment obligations you have, the lower your DTI, and the lower your DTI, the less risky youll appear to a lender. In short, if your DTI is 36% or below, youre generally in the clear.
Is a 16% debt-to-income ratio good?
Typically, in the case of a mortgage, your debt-to-income ratio must be no higher than 43% to qualify. That is the highest ratio allowed by large lenders, unless they use other factors to determine that you can repay the loan.
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