Notes On Debt And Income Ratio Essay

780 Words Jun 25th, 2015 4 Pages
Recently, I had a conversation with a friend who was trying to refinance her home. Two different lenders denied my friend because “her debt-to-income ratio was too high”. My friend was frustrated and asked me why this happened and what her “debt-to-income ratio” meant.

My friend asked me whether taking utility bills out of her name would help. I said “no”. My friend asked me if cancelling credit cards that she no longer used (with a zero balance) would help. I said “no”. My friend could not understand why or what her debt-to-income ratio had to do with refinancing her home. Here is what I wanted her to know.

Your Debt-to-Income Ratio Explained

Your debt-to-income ratio is a personal finance measure that compares your debt to your income. Your debt-to-income ratio is calculated by dividing your total monthly debts by your gross monthly income (given as a percentage). This is a general benchmark that is used together with other indicators to determine your creditworthiness (particularly when buying a house).

For example, let’s say my friend’s total recurring monthly debt was comprised of a $1,000 housing payment (mortgage, pmi, taxes), a $600 car payment, a $200 car payment, a $220 credit card payment, and a $350 student loan payment, for a grand total of a $2,370 monthly debt payment. Let’s also say her gross monthly income $4,000. This means her debt-to-income ratio would be 59% ($2,370/$4,000=0.5925). This is really high, and my friend would have a hard time getting a…

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