Learn About the Debt-to-Income Ratios

May 14, 2018

In the finance world, the debt ratio is used to measure the amount of leverage a company is taking by comparing the amount of debt a company has to its assets. When it comes to personal finance, we can use the debt-to-income ratio as a measure of the financial risk present in our own circumstances. The ratio is calculated as follows:


Debt-to-Income Ratio = Total Monthly Debt/Total Monthly Income


Let’s say you currently have a mortgage payment of $2,500 and vehicle loan payments totaling $500. Your current monthly debt is $3,000 ($2,500 + $500). Your collective monthly income is $7,500. This means that your debt-to-income ratio is 40% ($3,000/$7,500 = .40).


When it comes to qualifying for a mortgage most lenders want to see a score in the low 40s or lower (including the loan they would be making you). This tells them that you have the capacity to make the payments on the money they’re lending you. If you’d like to lower your debt-to-income ratio, there are two ways to do so: reduce your monthly recurring debt or increase your monthly income. If you find yourself needing help with either of these objectives, please feel free to give us a call!

Share on Facebook
Share on Twitter
Please reload

Recent Posts
Please reload

Archive
Please reload

Related Posts
Please reload

DISCLOSURE Information on this website and others should be used at your own risk. Past performance does not guarantee future results. Securities investments involve risk; returns in such investments vary and may involve gain or loss. The materials and content herein are not a substitute for obtaining professional tax, personal financial planning, or other relevant financial advice from a qualified person or firm. For full disclosure click on the disclosure link at the bottom.

Subscribe to our Weekly Newsletter

2945 Townsgate Road Suite 200

Westlake Village, CA 91361

+ 888-571-5582

help@cedarstoneadvisors.com

Send Us a Message