Understanding your Debt to Income Ratio

01.  Debt to Income Ratio Basics
02.  Calculate your own Debt to Income Ratio
03.  Debt to Income Ratio Frequently Asked Questions
04.  Debt to Income Ratio Chart

Debt to Income Ratio Basics

Your debt to income ratio is a very important factor to lenders. It allows the lender to make an educated guess on your financial future. Attached to this newsletter is a worksheet that will take you step by step to figure out your own debt to income ratio. The lender will make calculations and figure out a number, which will give them an insight on your financial situation.

1. Here are the Basics of Debt to Income Ratio

The total consumer debt today is 1.7 trillion dollars. Did you know that the average American carries a debt of $8,562.00? We paid over $50 billion dollars in interest in 2001,which averages out to about $1,000 per consumer. Most people carry at least 8 credit cards and 2 of them are usually maxed out. There were over 1.1 million people that filed for bankruptcy last year.

Needless to say many Americans are in a lot of debt. However, they still have needs and wants. Most of the time people do not have enough cash to make big purchases like a house or a car, so they depend on banks and other institutions to loan them money. Lenders are looking at many things when applying for credit. They are looking at your credit score, your job history, references, and your debt to income ratio.

Your debt to income ratio is a very important factor to lenders. It allows the lender to make an educated guess on your financial future. Attached to this newsletter is a worksheet that will take you step by step to figure out your own debt to income ratio. The lender will make calculations and figure out a number, which will give them an insight on your financial situation.

This number can range from 0 to 100. It is done in percentages. The higher the number the more debt you have, therefore the higher risk you are to the lender. You want to try to keep your debt level as low as possible.

There are 2 ways to lower your debt to income ratio. The first way is to pay off some bills. Any bills that you are able to pay off will lower your debt level. The other way is to get more income. If possible raising your income will lower your debt to income ratio. Unfortunately, there is no quick fix to lowering your debt to income ratio.

2.How to Calculate your own Debt to Income Ratio

Step 1 - Calculate your monthly take-home pay.
Step 2 - Calculate your total monthly debt payments.
Step 3 - Divide your total monthly debt payments by your total monthly take home pay.

[ Download printable Version ]

Calculate your monthly take home pay:

Monthly Income	$
Tax Refunds	$
Dividends or interest	$
Other income subsidies	$
Bonuses, commissions, or tips	$
Full or part-time employment income	$
Child support or alimony received	$
Pension or other retirement income	$
Welfare or other government entitlement programs	$
Total	$

Calculate your total monthly debt payments:

Monthly Debt	$
Car payment(s)	$
Loan payment(s) (furniture, appliances, etc.)	$
Financial institution loan(s)	$
Student loan payment(s)	$
Other loans/credit accounts	$
Credit card payments	$
Payment for past medical care	$
Total	$

Divide total income by total debt	$
Debt to income ratio	%

3. Debt to Income Ratio Frequently Asked Questions

What is debt to income ratio?
It is a number that represents your financial situation.

How is this number calculated?
This number is simply calculated by dividing your monthly minimum debt by your gross income.

Is my mortgage included in my debt?
No. Mortgage or rent is not included in your debt. Other exceptions of debt are utilities, food and entertainment money.

What is my debt to income ratio used for?
It is a financial glance for lenders. They use it to determine how well you are doing with debt. It lets them make an educated guess on how well you will pay back their loan.

What is an acceptable debt to income ratio?
All lenders vary on what they require. However, if your debt to income ratio is 10% or less you are considered great. Usually 20% or higher and a lender knows that if you get an unexpected cost their loan may be put on the back burner.

Will I be denied if I have a debt to income ratio that is really high like 50%?
It depends on the lender. They may alter the terms or charge more fees.

How do I lower my debt to income ratio?
Pay off bills and/or raise income.

Why is it important to monitor my debt to income ratio regularly?
It will help you stay on top of your financial situation. By monitoring and keeping it as low as possible you will be able to obtain the best financial terms offered.

4. Debt to Income Ratio Chart

Debt to Income Ratio	Financial Situation
10% or less	Doing excellent.
11% to 20%	Most people can carry this debt without any problems
21% to 35%	You are not in the hole yet. You need to start taking control and paying what you can.
36% to 50%	You need to take action right now. Try to steer clear of getting in any more debt or you may need professional help.
50% or more	You need to look into getting professional help

Got a question? Then contact our Education Team on 561-883-2398 Ex.310 United conducts regular seminars on financial education, including "How to Budget", come along and join us - to reserve your seat contact our Education Team on 561-883-2398 Ex.310

Newsletter 07
Rev.1
July, 2005