When it comes to anything in life, having a balance between good and bad things is very key. With your finances, especially in this economy, it is very important to keep things in check. No matter your credit rating, or just your cash flow, it is very good to keep on top of it. If there is one thing that others do not know on what to keep track of, it is your ratio between your debt and income. The definition of a debt to income ratio is the rate of how much money you are brining in (income) that is subtracted by the amount of money that is owed to collectors or credit card companies (debt). While this can be used for general finances, it will really only come into play when seeking for a big loan, such as a mortgage.
The ratio, abbreviated as DTI, has two functions to it. The first one is called a front ratio, which is the percentage of the income that is going to costs related to housing. For those renting, this is the rent that is paid on a monthly basis; for the homeowners, the basic costs will go for the sum of monthly principal, interest, taxes, and insurance (PITI for short). Depending on the community, there might be other associated fees, such as dues to the homeowners’ association. The second kind of DTI, also known as the back ratio, is the percentage of difference between the income a person has and the amount of money owed to a debt. This will include credit card balances, car loans and student loans for just the basics. Legal judgments, such as lawsuit payments, alimony and child support is also counted towards the back ratio.
When you are trying to get a mortgage, there will be a lot of lenders that will require either a ratio of 28 and also 36. The 28 will only calculate for the payment for housing; the 36 will take note of the payment for housing and also any recurring debt that is present. To figure this out, you take your yearly income and divide it by twelve (number of months in a year). That number becomes your monthly income. Take that number and you multiply it first by .28. Next, take your monthly income and multiply it by .36. This only works for the front DTI, there is a separate calculation for the back DTI.
