What is debt to income and why does it matter?

Debt to income, or DTI, is defined as the amount of all debt payments per month divided by the amount of income that you make each month. The goal is to have a low percentage preferably less than 36%. Most people don't go around worrying about this ratio, but banks do.

The reason that banks look at this ratio is that if you have a high amount of debt payments there is not a lot of extra money left for emergencies. If you were to need some extended time off of work without pay, how long could you make it before you run out of money. This is why this ratio plays an important part in the credit decision. With a low ratio, you could expect a fast approval process as long as there are no issues with your credit score.

Here’s an example. Let’s say that you make $10 per hour. That is roughly $1,600 a month. For this example, we will assume your taxes add up to $200. This will leave you with $1,400 available to live on. Now if you have a mortgage, car payment, and some credit cards that total to $800 in payments the calculation would look like this: $800/$1400x100=57.14%.

It is important to have an idea about your financial picture before you go to the bank. When you fill out an application, your credit score is effected and can determine the ability to borrow in the future.

Thank you for taking the time to read my blogs. I am in no way a subject expert and these are simply my opinions I welcome any thoughts and discussion.