What is Debt to Income Ratio?

What is Debt to Income Ratio?

What is Debt to Income ratio? Debt to Income Ratio is the ratio that defines your net worth. Net Worth is the number that combines all your liquid and non-liquid assets together and subtracts your debt. Your Debt should be less than your assets. The reason for this is to prevent you from losing money. You should always have a positive net worth and should never if at all possible, go negative. People that end up going negative on their ratio tend to declare bankruptcy or end up financially ruined.

How does Debt to Income Ratio Work?

“For example, if you pay $1500 a month for your mortgage and another $100 a month for an auto loan and $400 a month for the rest of your debts, your monthly debt payments are $2,000. ($1500 + $100 + $400 = $2,000.) If your gross monthly income is $6,000, then your debt-to-income ratio is 33 percent. ($2,000 is 33% of $6,000.)” states the Consumer Finance Protection Burro.

How can this ratio affect me?

Banks look at your ratio to determine your financial ability to pay back any money that is borrowed. For example, if you are needing a $10,000 loan from a bank. But have a 75% Debt to Income Ratio. You likely will not be getting that loan. You will be seen as high-risk and therefore they will not take the chance on you.

What is the 43% rule?

The 43% rule is a guideline for your debt to income ratio. When you have a higher ratio it then becomes significantly harder to get loans. You can be approved for loans if you have a higher debt to income ratio. However, in the case of mortgages, you likely will not qualify for a qualified mortgage.

What is a Qualified Mortgage?

“A Qualified Mortgage is a category of loans that have certain, more stable features that help make it more likely that you’ll be able to afford your loan.” states the Consumer Finance Protection Burro. This is important because a non-qualified mortgage can be devastating and cause significant financial strain on you and your family. Finances are the foundation of everything we do. The best way to concur with them is to understand them. Do your research before taking out any type of loan, mortgage, or credit card. It’s better to know more about what you’re signing then to not know what you just signed. When in doubt ask questions.

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