Financial Word of the Week: Debt-to-Income
Last week we explained what Loan-to-Value meant, specifically with mortgages. Now it’s time to tackle another important ratio: Debt-to-Income (DTI).
Your DTI ratio tells lenders how much of your income goes towards your debt and is another number you want to be low. Lenders will look carefully at your DTI ratio, along with your credit score, LTV, and other factors when considering you for a loan. You should aim for a DTI ratio of approximately one third (or lower).
How to calculate
Add up all of the debt payments you make each month (mortgage, student loans, vehicle loan, outstanding credit card balance, etc.). Then divide it by your gross monthly income (pre-tax). So if you make $50,000/year or $4167/month and have $1,500 in debt to pay each month, your DTI would be $1,500 ÷ $4,167 = 36%.
If you’re thinking of buying your first home, calculate how much house you can afford with this calculator, but also factor in how much debt you already have.
UMB Financial Corporation (Nasdaq: UMBF) is a diversified financial holding company headquartered in Kansas City, Mo., offering complete banking services, payment solutions, asset servicing and institutional investment management to customers. UMB operates banking and wealth management centers throughout Missouri, Illinois, Colorado, Kansas, Oklahoma, Nebraska, Arizona and Texas, as well as two national specialty-lending businesses. Subsidiaries of the holding company include companies that offer services to mutual funds and alternative-investment entities and registered investment advisors that offer equity and fixed income strategies to institutions and individual investors.