Spring Break
Learn how to calculate your debt-to-income ratio
Jessica White/DC Columnist
Issue date: 6/24/07 Section: Business
Dear Ms. Mortgage Maven,
I make $33,000 per year and want to buy my first home. I had some questions about lowering my debt-to-income ratio. My sister wants to take over my car and the payments of $550 a month. The car company told her they could put the payments in her name, but I would still be on the note, like a co-signer. Would that debt still count against my total debt-to-income ratio, even if we sign an agreement that she now owns the car? I cannot sell the car to her outright because it is worth less than what I owe on it, since I rolled over the unpaid balance from my last car to this car. Let me know what your thoughts are on the situation.
Lateasha
Dear Lateasha,
You clearly have done some research into the home buying process. Not too many people even know what a debt-to-income ratio is, and even fewer are concerned about manipulating their own debt-to-income ratio.
I cannot tell you how many times I have spoken with would-be buyers who have steady jobs with a modest income and have a car payment that is proportionally out of whack for their income. You make $33,000 per year, and your car payment is $6,516. That's about one-fifth of your income. Ouch!
Debt-to-income ratios are just that - the relationship between your debts and your income. Lenders calculate a borrower's monthly debt-to-income ratio. Simply put, we take your monthly income ($33,000 divided by 12 = $2,750/month). Then we tally up all the minimum monthly payments required by the bills that show up on your credit report - student loans, car payments and credit card bills are the most common.
Let's say your monthly payments on your student loan are $100, your credit card payment is $50 and your car payment is $550. Your total bills are $700 per month. With a salary of $2,750/month, your debt-to-income ratio is just above 25%. Why is that significant? Because various loan programs from different lenders will allow for a debt-to-income ratios of generally 33% - 50% (and even higher), including your mortgage. With a "DTI" of 25% already, you do not have a lot of room left over for a home loan.
I make $33,000 per year and want to buy my first home. I had some questions about lowering my debt-to-income ratio. My sister wants to take over my car and the payments of $550 a month. The car company told her they could put the payments in her name, but I would still be on the note, like a co-signer. Would that debt still count against my total debt-to-income ratio, even if we sign an agreement that she now owns the car? I cannot sell the car to her outright because it is worth less than what I owe on it, since I rolled over the unpaid balance from my last car to this car. Let me know what your thoughts are on the situation.
Lateasha
Dear Lateasha,
You clearly have done some research into the home buying process. Not too many people even know what a debt-to-income ratio is, and even fewer are concerned about manipulating their own debt-to-income ratio.
I cannot tell you how many times I have spoken with would-be buyers who have steady jobs with a modest income and have a car payment that is proportionally out of whack for their income. You make $33,000 per year, and your car payment is $6,516. That's about one-fifth of your income. Ouch!
Debt-to-income ratios are just that - the relationship between your debts and your income. Lenders calculate a borrower's monthly debt-to-income ratio. Simply put, we take your monthly income ($33,000 divided by 12 = $2,750/month). Then we tally up all the minimum monthly payments required by the bills that show up on your credit report - student loans, car payments and credit card bills are the most common.
Let's say your monthly payments on your student loan are $100, your credit card payment is $50 and your car payment is $550. Your total bills are $700 per month. With a salary of $2,750/month, your debt-to-income ratio is just above 25%. Why is that significant? Because various loan programs from different lenders will allow for a debt-to-income ratios of generally 33% - 50% (and even higher), including your mortgage. With a "DTI" of 25% already, you do not have a lot of room left over for a home loan.
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