FRANKLIN NEWSFLASH: The Debt To Income Ratio, and Its Effects to Your Borrowing Power
In today’s market, banks want to be sure that you can afford a monthly housing responsibly along with all other debt considered in the home loan approval on a monthly basis before considering on giving you a loan. Gauging a responsible/affordable threshold is why the Debt-to-Income (DTI) was established.
So, what is the debt-to-income ratio?
DTI thresholds can vary but the debt to income ratio represents a percentage of your gross income that is spent on TOTAL debt payments which often include all types of loans, mortgages, credit card payments and even child support.
The Debt-to-Income ratio measures affordability against the loan program specific threshold…
If you want to measure affordability and want to calculate the debt to income ratio, just divide your total debt by your gross income, and multiply to 100 (multiplying by 100 indicates the percentage). For example, if you make $3500 per month and have a total of $1330 in monthly debt, the Debt-to-income ratio is 38%.
Total Housing Debt Ratio
Total Debt-to Income Ratio
Housing Ratio = Income divided by total housing payment
Total housing payment = principle + interest + taxes + insurances + Homeowner Association fees (if applicable)
Total Debt to income (DTI) = income / total debt
TOTAL DEBT = Total housing payment (principle + interest, taxes, insurances) and all other revolving (i.e. credit cards) and Installment (i.e. car payments) debts.