Debt to Income Ratio
Your debt to income ratio is a simple equation that will tell you how much home you can afford.
The formula for calculating your debt to income is simple: monthly fixed expenses divided by gross monthly income (before taxes and deductions). If your result is a percentage greater than 36%, your credit score will be negatively affected because you are considered to have too much debt.
This means credit card companies and banks will likely turn down your application. Of course, each lender sets its own policy. Some might only approve your loan if you have a ratio below 30%, while others will accept a higher one. But a general rule of thumb is to keep your ratio below 36% if you want to get financing.
HOW TO CALCULATE YOUR RATIO:
To calculate your score, you need to add up your monthly fixed expenses. Monthly fixed expenses include all debt, such as the following: house payment or lease, credit card and other revolving credit balances; car payments, alimony, child support, etc. Do not include grocery, telephone, and utility bills or any debt that will be paid off in the next few months. If your car loan will be paid off two or three months from now, don't include it in the equation.
Gross monthly household income: $5,000
Fixed expenses: $1,560
- house payment $540.00
- car payment $370.00
- credit cards $250.00
- child support $400.00
$1,560 / $5,000 = 31%
This sample calculation shows that this individual needs to start paying down his or her debt rather than accumulating more.
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