This Debt To Income Ratio calculator estimates your debt to income ratio (DTI) by considering your gross monthly income and all of your current debts no matter of their type. There is more info on how to estimate your affordability to take another loan below the form.
How does the Debt To Income Ratio Calculator work?
When trying to determine how much will lenders allow you to borrow in case you already have some loans such a financial tool may come in handy as it allows to quickly figure out your position in the eye of a creditor. The algorithm behind this Debt To Income Ratio calculator takes account of the following variables that should be provided:
- Recurring monthly mortgage (RMMP) payment in case you already run such a loan;
- Other recurring monthly debts (ORMD) if applicable (personal loans, credit card balance, unsecured loans);
- Monthly taxes expenses value (MTEX) (e.g. property tax);
- Monthly insurance expenses (MIEX) (e.g. homeowners insurance, PMI on the existing mortgage);
- Gross monthly income (GMIN).
The formula used in this case is:
DTI = (RMMP + ORMD + MTEX + MIEX) / GMIN.
The interpretation of the DTI levels
The debt to income ratio is a figure that demonstrates an individual's ability to repay its monthly debts entirely and in due time. That is why every creditor looks at your debt to income level to see whether you may qualify for new loan or not and if so which is the risk for a default in your case. Thus this indicator is a primary one and here’s the interpretation of its levels:
- DTI between 0 – 36 % is considered as acceptable - not risky.
- DTI between 37 – 40% is an above acceptable level – low risk.
- DTI between 41 – 47% is an upper limit level – increased risk.
- Over 48% is unadvised level while is considered to be very high risk.
Example of a calculation
Let’s assume that someone has the following situation and check his financial position:
- Current monthly mortgage payment of $1,000
- Other monthly debts of $250
- Monthly property tax he pays is $200
- Gross annual income is $42,000 which means that monthly he earns in average $3,500
Your Debt to income ratio = 41.43%
Usually lenders prefer a 36% debt-to-income ratio, with no more than 28% of that debt allocated for the house mortgage. Therefore a debt-to-income ratio of 37-40% is often perceived as an upper limit, despite the fact that some lenders would be able to manage even a higher debt to income ratio.
What you should take into consideration is that a higher number of people are in the 41-49% range, that suggests a higher financial risk. Financial advisors also agree that a debt-to-income ratio above 50% is even riskier. Ideally the debt to income ratio should be as low as possible and heading for 0%.
So try to go for lower ratios in order not to put yourself at risk from unexpected changes to your income or other debts.13 Mar, 2015 | 0 comments