What is Debt to Income Ratio & How to Calculate Yours

17 Apr What is Debt to Income Ratio & How to Calculate Yours

Debt to income ratio is the percentage of a consumer’s monthly gross income that goes toward paying debts.  This sometimes includes more than debts.  Debt to income ratio can also include certain taxes, fees, and insurance premiums.  For a more detailed explanation, click here.

Your debt to income ratio is typically used in making credit and lending determinations by lenders (mortgages, automobile loans, credit cards, etc.).  MSN Money has a free debt to income ratio calculator.  For example, a person with a $1,900 per month income who pays $800 per month in rent, $350 per month for an auto loan payment, and $100 per month for a student loan payment has a debt to income ratio of 66%.  Typically, conventional loans will allow up to a 43% debt to income ratio to make a loan.  VA loans have a debt to income ratio limit of 41%.  Some lenders may accept up to a 55% debt to income ratio.  As you can see, our hypothetical person would probably not qualify for any type of loan except perhaps a loan with less than favorable terms (i.e. very high interest rate, etc.)  It is important to keep track of your debt to income ratio and work toward paying down your debt.  Reducing your debt to income ratio can open lending options for credit purchases you plan to make in the future.

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