Refinance options and debt to income ratio explained

The calculation of the debt to income ratio helps in getting the exact monthly debt amount and better management of debts and finances for repaying the same.

Calculating the debt to income ratio

The calculation of the ratio is done through the comparison of the amount of the debt, which does not include the mortgage payments, and other monthly costs to the gross income. In many cases the ratio can be calculated on a per month basis. If the monthly gross income of a debtor is 2500$ and the 500$ is given for the debt payment then the debt to income ratio is 20%. This ratio helps to compare the debt liabilities as per the income and the total debts and payments owed along with the monthly gross income.

The other additional costs associated with living are calculated into these ratios even if it’s not disclosed. 

Figuring out the debt-to-income ratio

For figuring out the ratio, the gross monthly income should be calculated first. The gross monthly income should be the amount prior to all the tax deductions. If a debtor is paid every alternative week then the take home money should be multiplied by 26. The result should then be divided by 12 which will show the monthly take home payment of the consumer. For those with inconsistent incomes should get the average calculation of their monthly income by dividing the net income of the previous year by 12.

What should be included in the debt to income ratio?

While calculating the debt to income ratio the income which comes from alimony and child support should be included. An average of bonuses, tips, commissions and other similar options should also be included. The earnings which come from dividends and interest on the same are also a part of this calculation. Income from other sources like government benefits should also be used in this calculation. That includes income from investments, stocks, bonds, options, 401k or the sale of an asset. However many companies will not ask you to disclose all investment or additional sources of income if they do not exceed a certain amount, typically $500 or less.

The payments of monthly debts

The monthly debt payments can be calculated by adding the minimum monthly income and the payments for all the loans like car and home loans, medical bills and credit accounts. The mortgage payment should not be included. The monthly debt payment should then be divided by the monthly take home payment so that the debt to income ratio can be generated. The ratio percentage of the same can be availed by dividing the total monthly debt payments and the total monthly take home.

Acceptable debt to income ratio

The lower this ratio is, the better the financial position of the debtor. Generally a ratio of 16 to 19 percent is considered decent. The debtors, with a ratio of 20% or higher, need to check and control their credits. The debt payment becomes less over time and so does the interest rate.