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 financial services holding company headquartered in Kansas City, Mo., offering complete banking, payment solutions, asset servicing and institutional investment management to customers. UMB operates banking and wealth management centers throughout Missouri, Illinois, Colorado, Kansas, Oklahoma, Nebraska and Arizona. It also has a loan production office in Texas. Subsidiaries of the holding company include mutual fund and alternative investment services groups, single-purpose companies that deal with brokerage services and insurance, and a registered investment advisor that manages the company's proprietary mutual funds and investment advisory accounts for institutional customers.