WHAT IS DET TO INCOME RATIO?

Your debt income ratio can be defined as the “proportional relation between your income (cash inflow) and your debt (cash outflow) in a particular month. Basically it is an estimation of your capacity to bear your debt burden. The ratio between income and debt is computed by dividing your, Total monthly debt payment/Gross monthly income. The higher the ratio the lower would be your ability to pay back the debt and vice versa.

What should you include in your Total Monthly Debt?

Your total monthly income mainly comprise of:

• house payment or lease,

• credit card and other revolving credit balances;

• car payments,

• alimony,

• Child support, etc

However your grocery, telephone, and utility bills or any debt that will be paid off in the next few months should be exempted from the calculation.

What is your Gross monthly income?

Your gross monthly income is your total salary before any reductions made or
Tax imposed on it.

What is the standard rule of the debt to income ratio?
28/36 is a standard measure that has been adopted to detect your financial status. The” 28/36 rule” sets forth that if the value of your debt to income ratio is 28 or less you have huge debt burden and undergoing an acute financial crunch. If the value is 36 or more it can be said that you are safe and competent enough to manage your finance .A value of your debt to income ratio between 28 and 36 implies that your financial life is neither sound nor disastrous.

How does debt to income ratio help the lenders?

Lenders often refer to this standard measurement of 28/36 to analyze your financial
stability. This further helps the lenders to figure out how much loan they can sanction for your home purchase and mortgage refinancing without any risk.

How does the debt to income ratio facilitate you?

The debt to income ratio also serves a genuine purpose for you to gauge on your own economic status. It helps you to comprehend on what amount you are capable to pay for a mortgage, other bills and any other purchase you would like to make. For instance, if you intend to bye a car and get a pre approved mortgage at the first stage the lender would calculate your debt to income ratio. This would facilitate you to get a true picture of the budget that you can afford to bear for the house. The pre budget would not only narrow down your search of the house to a range fixed according to your budget but also save your time. Likewise if you follow the same process in buying a car or furniture and so on, your debt to income ratio, in all cases would help you to regulate your finance wisely. This would at large help you to learn proper ways to tune up you finance in a smart way.

What should I do to improve my debt to income ratio?

Your debt to income ratio is as important as your credit score to get an approval on your loan. Thereby it is good to maintain a sound debt to income ratio. If your debt to income ratio is not within the acceptable range then you need to do two things immediately:

1) Reduce your debts and

2) Increase your Income

For this what best you can do is

• Access your present salary and check whether you have scope to negotiate according to the market value

• Try and surch for some part time jobs

• It’s high time you cut down on your luxuries, trim your other expenses and tactfully make savings to repay your debts

Debt to income ratio: from a different perspective

It can be said that $8,980,000 mortgage is too much for any average earning man. Whereas mortgage of $8,980,000 is for Bill Gates or Warren Buffett, it’s not much. This is because the income of the average earning man is much less compared to his debt value. When you calculate debt to income ratio for the average earning man the value might be beyond the standard rule i.e. than 28.The debt calculator would say

“DANGER AHEAD! You are now trapped in the vicious debt cycle. You seem to be a spendthrift. Right away minimize your expenses. Seek help from a professional.”

In the second case the value of debt to income ratio when calculated it shows that the value is more than the normal .This means the standard value is more than 36.And the debt calculator would reflect….

“Relax! You seem to be competent to bear the debt load smoothly. It is a sound and healthy situation that you are experiencing.”

Thus to avoid all financial hurdles you should calculate your debt to income ratio on a regular basis. In this way you can review your credit condition and modify it accordingly.

Related information on debt to income ratio:

Debt estimation: Debt playing an evil role in the money cycles it always advisable to cut down your debt burden. To work on your debt thereby is to estimate your debts.

Income assessment: Too much of expense seems to be a craze in today’s world. Nearly all men are becoming spendthrifts. In reality it can be considered till you are able to bear the expenses from your income else it might lead to unbearable debt. So it is important to estimate your net income.

Budgeting: Ideally if you can estimate your net income and estimate your expenses accordingly then you may skip debt burden

Gauge on your debt to income ratio: debt to income ratio is calculated by adding up all your monthly debt namely credit card bills, student loans, mortgage or other loans and divide it by your gross income and multiply it by 100 and you get your debt to income ratio score .

Evaluating and Rating your debt to income score: According to the standard rule of 28/36, it is said that if you have a score of 28/36 then you have an acceptable potentiality to pay back the loan

Credit scoring: It is an estimation on the basis of which your creditworthiness is evaluated.

Want to calculate your debt to income ratio?