What does debt to income ratio mean and what should yours be

What Does Debt to Income Ratio Mean and What Should Yours Be

If you are applying for loans, you may have heard about debt to income ratio. Your loan rates and even the possibility of getting a loan is based, in part, on your debt to income ratio. It is also a way to see if you are financially healthy. The short version is, the lower your debt to income ratio, the better off you are.

Speak to our debt experts for free so they can explain your options to you.

What is Debt to Income Ratio?

The debt to income ratio looks how much you owe versus how much you earn. It is calculated by taking the monthly payment total of all your debts divided by your monthly gross income. That number is then multiplied by 100 to give you a percentage.

How to calculate debt to income ratio:

  • Add up all your monthly debt payments (car loans, credit card minimum payments, etc).
  • Calculate your gross monthly income (that what you make before taxes)
  • Divide the debt by the income 
    • debt/income= (a number less than 1)
    • If the number is greater than 1, either you did the math wrong or you have more debt than you have income
  • Multiply that number by 100

For instance: you have $1000 in monthly debt payments and $4000 in monthly income. The ratio is 0.25 or 25%. 

If you prefer to use a debt to income ratio calculator, there are several available online.

Lenders consider a good debt to income ratio to be less than 43%.  The higher your debt to income ratio, the lower the probability that you will be able to repay a new loan.

Mortgage to Income Ratio

Mortgages generally have more stringent criteria than cars or other types of loans. Depending on the lender, you may be able to have a slightly-higher-than 43% debt to income ratio in order to get a qualifying mortgage. A qualified mortgage protects you from interest only loans, increasing loan principal (negative amortization), balloon payments, and excessive upfront points and fees. 

If you have a debt to income ratio that is higher than preferred, shop around for a lender who may be able to help. Studies show that people who look at three or more different mortgage companies receive better rates and terms. 

Mortgage lenders prefer that your mortgage payments are no more than 28% of your gross monthly income. This is you mortgage to income ratio. This is calculated in exactly the same way as debt to income ratio, but with total monthly mortgage payments instead of debt payments.

Is Debt to Income Ratio the Same as Debt to Equity?

Debt to equity ratios are similar to debt to income ratios. Debt to equity is used by companies to evaluate the health of the company and whether it can take out loans to cover business expansion, new equipment or buildings, etc.

How Pacific Debt Can Help

If your debt to income ratio is out of control and you are having trouble making monthly payments, Pacific Debt, Inc. may be able to help you.

Pacific Debt, Inc is one of the leading debt settlement companies in the US. We work directly with your creditors on your behalf in order to reduce your debt, often for substantially less than you owe. Your initial phone call is 100% free, and our debt experts will explain your options, so you fully understand them. 

Pacific Debt, Inc.

If you’d like more information on debt settlement or have more than $10,000 in credit card debt that you can’t pay, contact Pacific Debt, Inc. We may be able to help you become debt free in 2 to 4 years. We have settled over $250 million in debt for our customers since 2002.Pacific Debt, Inc is accredited with the American Fair Credit Council and is an A+ member of the Better Business Bureau. We rate very highly in Top Consumer Reviews, Top Ten Reviews, Consumers Advocate, Consumer Affairs, Trust Pilot, and US News and World Report.

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