The Debt to Income Ratio is one of the most important factors when determining your credit worthiness. The Ratio is equated by dividing total recurring monthly expenses from gross monthly income.
What is Debt to Income?
Debt to Income - Total recurring monthly debt obligations divided by total gross monthly income.
Formula: Divide your gross monthly income by all monthly debt obligations (mortgage payments, home equity line of credit or 2nd mortgage payments, student loans, car loans and monthly minimum on any credit card payments).
Example: Consumer #1
Annual Income = $84,000
Monthly Income = $7,000
Mortgage - $1,500 per month
Car payments - $500 per month
Student Loans - $250 per month
Credit Card Payments - $750 per month
Total Monthly Expenditures: $3,000
Then we divide total monthly debt payments by total monthly income; So $3,000 / $7,000.
In this scenario, Consumer #1 has a DTI of 42.85%.
So Approximately 43% of their monthly income is going towards required debt obligations (not including food, insurance, taxes, etc.)
Debt to Income Calculator from Bankrate.
Lenders evaluate your DTI when deciding whether to extend a line of credit to you. Typically, a low debt-to-income ratio displays to lenders that you have enough income to cover your debt obligations. The lower your DTI is, the more likely you will receive favorable terms on any credit you are applying for.
Your debt-to-income ratio is a very essential part in determining your credit worthiness. Many consumers are unaware of the fact that, even if you have an outstanding credit score, if your Debt to Income Ratio (or DTI) is not favorable you will not qualify for many loan products/services. The reasoning for this is simple. An individual's DTI is essentially a balance sheet for their financial health and if your balance sheet shows that you have no leeway for unexpected costs, many lenders will view you as an unfavorable credit risk.
For many consumers that do not have great credit or a good debt to income ratio, a debt relief program may be a good financial solution to help them save money and become debt free.