What is a debt-to-income ratio?
Your debt to income ratio compares the amount of your debt (minus your mortgage payment) to your gross income. In most cases, the ratio is calculated on a monthly basis. For example, if your monthly gross income is $2,500 and you pay $500 per month in debt payment on loans and credit cards, your debt-to-income ratio is 20 percent ($500 divided by $2,500 = .20).
Debt-to-income ratio compares debt liabilities to income.
Debt-to Income Ratio = Total Debt Payments / Monthly Gross Income
How do I calculate my debt-to-income ratio?
The first step in calculating your debt-to-income ratio is figuring your gross monthly income, which is the amount you earn prior to all deductions. If youre paid every other week, multiply your take-home pay by 26, then divide by 12. This is your monthly take-home pay. If your income is inconsistent, estimate your monthly net pay by dividing the previous years annual net pay by 12.
Remember to include:
· Income from alimony and child support can be counted as income
· Conservative averages of bonuses, commissions and tips
· Earnings from dividends and interest
Miscellaneous income such as government benefits and/or assistance. The 2nd step is figuring your total monthly debt payments. Add your present minimum monthly payments for all credit accounts and loans, excluding mortgage payments. Be sure to include:
Loan payments (furniture, dept. store etc.)
Credit card payments
Payment for medical collections
Divide your total monthly debt payment by your total monthly take-home income from all sources. The result will be your debt-to-income ratio.
Total monthly debt payments divided by monthly take-home pay equals your debt-to-income ratio percent.
Is my debt-to-income ratio acceptable?
In most cases, the lower your debt-to-income ratio, the better your financial condition. Youre probably doing OK if your debt-to-income ratio is under 16-19 percent. Though each situation is different, a ratio of 20 percent or higher often signals a need to control your credit. As your debt payments decrease over time, you will pay less interest. Then you can use your money to save, invest, or spend as you choose.
What is an acceptable debt-to-income ratio?
Usually, the smaller your debt-to-income ratio, the better is your financial condition. A recommended debt-to-income ratio is under 15 percent. A ratio of 20 percent or higher signals a need to control credit and to begin a plan for regaining financial stability. Ideally, you will carry little or no debt so your income can be saved, invested, or spent as desired, rather than used on interest.
Sandy is a respected free-lance writer as wells as an account executive with I.H.E. Equity. You can also find more second mortgage related articles at BD Nationwide Mortgage Refinance or check out Second Mortgage California.
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