Debt to income ratio is the importance ratio that help banker and analyst to assess whether the loan requester could be able to pay off the debt that they are requesting or not.
If the ratio too high, the bank might consider not to provide the loan.
And if the ratio is low, the process of requesting loan is highly likely to success. Now, to be able to calculate the debt to income ratio, we need to know two importance things.
First is the recurring monthly income, and second is the gross monthly income. These two importance things will be used to calculate DTI.
You should be able to understand the formula of debt to income ratio before start calculation. Now here is the formula,
Debt to income ratio = monthly recurring debt / monthly gross income.
- Monthly recurring debt is any kind of debt the need to be paid monthly. For example, car loan, hours loan, and any others types of loan.
- Monthly gross income is any kind of income that earn monthly. For example, salary income and any others kind of income that could be verified. This is very importance. You can not just include the figure in, but you should be able to provided the evident to confirm that those income is real.
Calculate debt to income ratio:
Calculate debt to income ratio is quite easy if you know all of the items mention above, and they are verifiable. Here is example,
Assuming you have the following monthly recurring debt:
- Mortgage or rent = $1,000
- Minimum credit card payments = $500
- Car loan = $1,500
- Student loans = $500
- Alimony/child support payments = $1,500
- Other loans = $2,000
Monthly gross income:
- Salary = $3,000
- Overtime = $500
- Other income = $500
- Total monthly debt = $7,000
- Total monthly gross income = $4,000
Debt to income ratio = $7,000 / $4,000 = 1.75 time or 175%
Based on calculation above, we got debt to income ratio 1.75 time or 175%. This ratio is quite high and it might not attract bank attention to provide the loan unless there is evident that the ratio could improve.
For example, part of the monthly debt will soon be paid off, and there will be new income line to improve cash flow.