Debt income ratio

Debt Income Ratio - Debt income ratio is an important indicator of your complete and entire financial picture. This is the tool used in the lending industry’s measure of financial well being. Your debt to income ratio is calculated by dividing your monthly minimum debt payments, by monthly gross income. This does not count any mortgage or rent payments. If you were to have had an income of $2,000 and are making minimum payments of $400 on debt (this would include loans and credit cards etc.) you would have a debt income ratio of 20 percent.

This formula will vary slightly from lender to lender but only slightly. Some include the mortgage but raise the acceptable ratios... others do not. While variations will result in different percentage outcomes, the overall concept is the same: a debt income ratio compares debt load to income

Debt income ratio plans will protect you as well. It makes sure of what you can afford to pay for a mortgage and how much is still left over for other bills. It is important to do a debt income ratio prior to making any purchases. It may also be a very good idea to get your mortgage pre-approved prior to house shopping, as this will allow you to know what your true price range is and may save you from looking at houses that are truly out of your budget and save you from a lot of disappointments. There are many programs available that will help you do a debt income ratio and assist you with the pre-approval as well. This is a very important step and should not be skipped to save time.

Debt income ratio is a good plan before buying anything that will require paying over time. Purchasing furniture from a furniture store on a payment plan or major appliances as these may require a contract and a down payment and usually will accumulate interest. Or even a car since a car usually requires a long term commitment of at least 3 years or more, doing a debt income ratio will help you decide if you can actually afford this type of bill for such an extended amount of time. You may also want to include vehicle insurance when planning.

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