Calculating your Debt Income Ratio

Your financial status is generally determined by two different factors, income and debt. Income is the money coming in and debt is money going out so ideally you would like more income than debt. The ultimate question here is whether or not you are making enough income to balance out with your debt. This can be broken down by determining what your debt to income ratio is. It is important to know this because it will give you a greater view on your finances along with helping you determine if you can take on any more debt.

Financial Litmus Test with Ratios
Another way to gauge how your financial situation stands is by calculating your individual net worth. It is simply calculated by adding up all your assets such as your house, car, and investments compared to your liabilities. Ideally, you want more in assets than liabilities for the ideal financial situation to occur. Most people look at this figure on a year by year basis.

Both the debt to income ratio and net worth combined give you a glimpse into your personal finances. Lenders look highly at the debt to income ratio you have when they are considering you for any type of loan. You can be a smart shopper by calculating this figure on your own in order to find the best loan.

How to Calculate Your Individual Debt to Income Ratio
It is not difficult at all to calculate your debt to income ratio. Add all your debt up and take that total away from your income. People may calculate different by not including good debts like your mortgage and property taxes. However, for the best calculation include all debts no matter how large or small they may be.

Get all your monthly debt obligations gathered into one location. These include but are not limited to a car payment, child support, student loans, life insurance, minimum credit card payments, and your mortgage along with taxes and insurance on your home. No matter how insignificant the debt may be, add it in. Add all these numbers up and you will have your total monthly debt obligations.

The next step is to calculate your income for the month. Your salary is the very first step. Also, take any bonuses and divide them up into a month by month basis for an accurate number. Take a minute to think of any other income such as investments and throw that amount into the calculation as well. There now lies your monthly income.

The easy part has finally arrived. Take the debt you have and divide it by your monthly income to get your debt to income ratio. An example using numbers is if you have a total of $2,000 in debt and income at $6,000, you have a 33% debt to income ratio.

Why does this figure matter?
Now that you have your debt to income ratio you may wonder what the significance of all of these numbers is. A lower numbers means you have more income to spend on other purchases whatever you may desire. This number is incredibly important when deciding on a mortgage.

There are two different types of debt to income ratios to consider. The front ratio is all of your debt to income ratio completely including housing costs. The back ratio is a different factor which doesn't count your mortgage. As a ball park figure, lenders want 28% or less for a back and 36% of less for a front.

Obviously these figures are not set in stone for any individual. This is only one factor that can help determine if you are able to afford a house and for how much.

Lori English is a Los Angeles real estate agent, broker and internet business woman. As a web expert, she writes about LA homes for sale, as well as for other websites. With her experience, certificates, and degrees, she understands real estate, the internet business, and how to invest in properties.



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