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 you're 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 year's 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:
Car payments
Loan payments (furniture, dept. store etc.)
Bank loans
Student loans
Credit accounts
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.
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