Your debt-to-income ratio is simply the amount of monthly debt you have relative to your income. If you do not know your ratio, you may be in for a surprise when trying to finance a home, car or anything else. That is, debt-to-income ratio is a major factor in most lending decisions.
The Consumer Financial Protection Bureau says that any debt-to-income ratio above 43% may make buying a home difficult. Many financial advisors, however, recommend keeping debt-to-income ratio under 30%. Here is how to calculate yours.
Determine your monthly debt
First, you must determine how much monthly debt you have. To do so, list everything you must pay every month. The following should be on your list:
- Mortgage or rent payments
- Car payments
- Student loan payments
- Alimony or child support payments
- Any other regular monthly payments
When adding together your monthly debt, you do not have to include the following:
- Car and health insurance
- Phone and cable bills
Find your gross monthly income
After adding together includable monthly payments, you must find your monthly gross income. This amount, which is how much you earn before taxes, likely appears on the pay-stubs you receive with your paycheck.
If you receive a pension, Social Security benefits, alimony, child support or other monthly income, include the amount in your gross monthly income.
Do some quick math
To find your debt-to-income ratio, divide your monthly expenses by your gross monthly income. Then, multiply by 100 to see your ratio in a percentage.
For example, if your expenses are $1,000 and your income is $2,000, your debt-to-income ratio is 50%.
Ultimately, if your math indicates your debt-to-income ratio is too high, you may want to explore bankruptcy or other debt-management options.