What is a Debt to Income Ratio?
The debt to income ratio is a simple comparison of income generated in a specified period to the amount of debt that must be honored during the same period. Usually, a debt to income ratio is calculated for a one-month period, providing a snapshot of what must be earned in order to pay monthly obligations. Debt to income ratios are helpful in determining how much additional debt can be assumed without creating financial hardship. Understanding the relationship between debt and income is helpful in several different ways. For people attempting to develop a workable monthly budget, it is important to identify all current obligations and what type of monthly payment is required to keep the debts in good standing with creditors. For lenders, getting a true picture of the ratio of debt to income makes it possible to evaluate the ability of a borrower to assume additional debt. There are actually two distinct forms of debt to income ratio. The first is known as front end or high debt to rati
Debt to Income Ratio Your debt to income ratio is simply a way of determining how much money is available for your monthly mortgage payment after all your other recurring debt obligations are met. Debt limit There is generally a debt limit associated with each type of loan, such as a 28/36 qualifying ratio for a conventional loan. These qualifying ratios are guidelines. An excellent credit history can help you qualify for a mortgage loan even if your debt load is over and above the limit. Understanding the qualifying ratio Typically conventional loans have a qualifying ratio of 28/36. Usually an FHA loan will allow for a higher debt load, reflected in a higher (29/41) qualifying ratio. The first number in a qualifying ratio is the maximum percentage of your gross monthly income that can be applied to housing (including loan principal and interest, private mortgage insurance, hazard insurance, property taxes and homeowner’s association dues). The second number is the maximum percentage
A debt-to-income ratio or DTI is the percentage of a person’s monthly gross income that is dedicated to paying debts, although the term can also apply to more than just debts, such as certain taxes, fees, and even insurance premiums. Debt to income ratio is classified into two types: Front ratio – this is the income percentage that is dedicated towards housing costs.
