.png/:/rs=h:101,cg:true,m/qt=q:95)
Ability TO Pay
DISCOVERING YOUR DEBT-TO-INCOME RATIO FOR FINANCIAL WELL-BEING
Discovering Your Debt-to-Income Ratio for Financial Well-being
Your debt-to-income ratio, a key metric for financial health, gauges the relationship between your monthly debt payments (excluding rent) and your income. Calculated on a monthly basis, understanding this ratio is crucial for managing your finances effectively.
Let's break it down with an example: If your monthly take-home pay is $2,000 and your debt payments for loans, credit cards, medical bills, or student loans total $400, your debt-to-income ratio is $400 divided by $2,000, resulting in 0.20 or 20%.
For most lenders, maintaining a debt-to-income ratio below 20% is considered "creditworthy." Higher percentages signal increased risk of credit challenges.
WHAT INCOME COUNTS?
When figuring out your debt-to-income ratio, start with your gross income, which is what you earn before taxes and other deductions are taken out. Be sure to include different sources of income, like your wages, permanent SSI or SSDI, permanent disability payments, earned income tax credits, and retirement income. It’s important that this income has been steady and can be verified over the last 12 months.
WHAT DEBT COUNTS?
To figure out your monthly household debt, list all your payments, including credit card bills, student loans, medical bills, vehicle payments, other loans, and any family support payments. Make sure to leave out utilities, groceries, and random expenses. For each account, only include the minimum payment required, as shown on your most recent statements.
Also, keep in mind the following:
- No excessive credit card debt, multiple unresolved bills in collections, late bills, or late rent.
- Don’t have any bankruptcies in the last 36 months.
- Make sure there are no repossessions or charge-offs in the last 12 months.
It's important to know that even if your student loans are on hold, lenders may estimate a monthly payment (usually 1-2% of the total deferred loan amount) to include in your debt-to-income ratio.
Feel free to use the Debt-to-Income Calculator below: add all your total debt payments and enter your monthly gross income. Understanding and managing these factors can help you secure a better financial future.