Debt-to-income Ratio

Definition of "Debt-to-income ratio"

Rosanta  Vallone real estate agent
Rosanta Vallone Fletcher Realty Services Inc

The Debt-to-Income Ratio (DTI) is one of the ways to assert ability to pay; that is, a way Lenders have to calculate if they will lend money to someone. The Debt-to-Income ratio (DTI) is all about figuring out if the borrower will be able to pay back the loan instead of constant defaulting because he/she is so stuffed with bills to pay and not enough money (income) to back them up.

Debt-to-income calculator

First thing you need to do to understand the Debt-to-income calculator is that the debt-to-income is calculated in the monthly sphere.

The debt = all monthly expenses related to loans. So, say you have a car lease where you pay $500 a month, a mortgage of $1,250 and another $250 for the rest of your debts: your monthly debt is $2,000 (500 + 1,250 + 250). Now, the income = your gross income. Let’s say your gross income equals $7000; all you have to do is get the 2,000 and figure out what percentage of 7,000 it represents (the answer is 28% for the people bad at math).

In our example, for you to understand clearly, we have put only loan-kind of debt, but you should also put anything that is a monthly expense, like alimony/child support, the minimum payment of your credit cards, monthly rent (if you do not own the house), student loans and whatever else is a monthly expense.

What’s a good debt-to-income ratio?

If the debt-to-income ratio is assigned to decide if a lender will give money to a borrower, there has to be a bad and a good debt-to-income ratio number, right?

The outcome is the risk your loan provides the Lender, so, usually, the lowest, the better. And the magic number is 43%; you want it to be under that.

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