Debt To Income Ratio


The Debt to Income Ratio Calculator is a helpful tool you can use to determine your specific debt to income ratio prior to applying for a loan. Having a high debt to income ratio may disqualify you for a loan or increase the cost of the loan.

A Snapshot of your Current Financial Situation

Your Debt to Income Ratio is an important barometer of your overall financial stability. As one indicator of your overall financial health, some lenders may even give more weight to this metric than your overall credit score. While the debt to income ratio is the most straightforward ratio and the easiest ratio to calculate, it is a leading indicator to lenders that identifies your ability to weather a short term or long term reduction of income and continue to maintain current payments of your debt obligations.

In the simplest of terms, the debt to income ratio is just what it says, the relationship of your total income to your total debt payments. Your debt to income ratio tells a potential lender how much of your monthly income is obligated to making payments on outstanding debt obligations. Lenders typically want to see a low debt to income ratio when granting additional credit to a borrower. Generally speaking, and depending on the type of loan you may be applying for, lenders want to see a debt to income ratio of about 1/3 or 33% to 36%. The lower this number, the higher likely hood of being approved for the loan.

The debt to income ratio can also be a leading indicator of risk, and therefore affect the pricing of the loan or line of credit you may be applying for. If your debt to income ratio is above 36%, lenders may see this as an indicator of potential financial stress. The higher the ratio, the greater the risk and therefore the higher likelihood you will pay more for the loan in terms of interest rate.

To calculate your debt to income ratio, simply add up all of your monthly debt obligations such as credit card payments, auto loans, mortgage loans and other monthly payments you make such as student loans, insurance and taxes. Then divide this number by the total amount of your monthly gross income. The resulting number will be your current debt to income ratio.

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