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The debt to income ratio is a measure of how much monthly debt you have in relation to your monthly income.
Monthly Income
Your income used here is your pretax income. If you make $5,000 per month before taxes than this is the number to use. Do not use after tax income figures for this. Make sure to figure out your monthly income precisely.
Monthly Debt Loan
The trickier part is figuring out your monthly debt load. Your credit report usually has all of this information. This can include:
-total loan balance
-monthly loan payment
These payments can include:
-car loan
-credit cards
-store cards
-student loans
-mortgage payments
-monthly home owner dues
The lender will add up all these debts to figure out what your monthly debt burden is. The mortgage balance they will use in their calculations is your future projected monthly mortgage expense if you are approved for the loan.
If you have a debt that is about to expire then the lender may not include this as part of your ratios. For example, if you currently have a car loan that you pay $300 per month but it will be paid off in two months then the lender may not include the $300 monthly car payment as part of their ratio calculation.
Debt To Income Ratio Example
-$2,000 monthly debt divided by $5,000 income per month
-this is a 40% debt to income ratio
Maximum Debt To Income Ratio
This can change from lender to lender. Many lenders want a debt to equity ratio of less than 40%. Some lenders will allow exceptions to these guidelines on a case by case basis. Some lenders will allow a debt to income ratio of over 50% or more.