The debt to income ratio tells us the percentage of your debt relative to your income. It is the main qualification standard that we have to use when determining what loan amount you would qualify for.
Here is an example that shows you how to calculate the debt to income ratio:
Bob earns $1,000.00 a month. Bob currently has a car loan that is paid monthly for $100.00 per month. He also has a credit card with a minimum payment of $50 per month. Those are the only liabilities that Bob has to his name. Therefore, his debt-to-income ratio can be calculated as follows: $150 (total monthly credit obligations) divided by $1,000.00 (monthly income before taxes). This comes out to be 15%. The maximum debt-to-income ratio we allow is 50% but sometimes certain exceptions can be made depending on the situation if you cross over 50% slightly (although this is very uncommon).
Some important notes here:
- Income is calculated as gross income before any taxes or deductions
- All liabilities or outgoing recurrent payments must be included in the liabilities section.
- Credit card liabilities are calculated as the minimum payment on your card. You must include all credit cards you have and add their minimum payments together.