And do you care? ;) I recently had a conversation with two different reps over at Chase to investigate my brilliant refinancing idea some more (I didn’t go into details of course, just threw out some “what ifs”) and one of the things they kept bringing up over and over again was to “not mess with my debt-to-income ratio.” A term I’ve heard plenty of times before over my years, but one that I didn’t really pay attention too much. (Because really, when is that ever important??)
Well, apparently when you buy a house :) Or anything else that you need to take out a loan for (or when you’re trying to refinance stuff).
At first I kept ignoring Chase’s comments about it because they seemed more interested in being rude to me than answering my questions (seriously, both account reps were horrible – since when are you not allowed to ask about one of the most IMPORTANT purchases of your life??), but after a while I just said, “Look – my DTI (“debt-to-income”) is fine, let’s move on” and so we did…
Then it occurred to me that I’ve actually never ran the numbers before, and just assumed all would be golden – mainly cuz our finances are pretty good. Not to mention I wasn’t exactly sure what DTI meant thoroughly either? So I decided to bone up on it a bit more, and then run the calculations for myself. After all, how can I call myself a finance nerd if I don’t even know my DTI? :)
So, what IS a debt-to-income ratio?
Well, it’s pretty much exactly as it sounds: all your debts compared to your total income. Or more specifically, your total monthly debts (using minimum payments) divided by your total gross monthly income. So if you pay, let’s say, $300 a month for all your loans and you bring in $1,000 total a month (before taxes), your debt-to-income ratio would be 30% ($300/$1,000). Which is fairly healthy and normal for a person.
Here’s a scale I picked up from U.S. News and World Report on what these percentages mean:
- 36% or less: This is a healthy debt load to carry for most people.
- 37%-42%: Not bad, but start paring debt now before you get in real trouble.
- 43%-49%: Financial difficulties are probably imminent unless you take immediate action.
- 50% or more: Get professional help to aggressively reduce debt.
So I guess even if you *don’t* plan on taking out a loan anytime soon, it’s still a good idea to keep this stuff in mind anyways. Gives you a general sense of how well you’re managing your money all around.
MY debt-to-income ratio!
With all this in mind, I rand my own numbers to see how it would pan out. Thinking it would be worse than what I would have liked it to show, but also hoping for the best. And here’s what it looked like:
All monthly debts: $1,940 (Remember, you’re only doing minimum payments here)
- 1st Mortgage: $1850
- 2nd Mortgage: $90
All income: $10,000’ish (*gross*)
- All sites/projects/consulting/etc…
It’s probably best to separate all your income out to give yourself a better picture, but mine is scattered across tons of different areas so I just totaled them all up on avg to make things easier here.
MY DEBT-TO-INCOME RATIO: 19.4% ($1,940/$10,000’ish)
Not too shabby! So SUCK IT Chase reps ;) Of course I didn’t get to this point all overnight or anything – we’ve spent years getting ourselves on track and ridding ourselves of our car loans and credit card balances/etc – but it’s nevertheless a beautiful thing to see. And also bodes well for a refinance in the future too, at least in terms of not having to worry about our DTI if and when we go that route. (The other areas like being too much underwater/etc will be the sticky points)
How about Expenses-to-Income Ratio?
I also wondered to myself what our DTI would look like if we included all our EXPENSES in the mix too – not just our debts and loans. So I made up a couple new ratios (I think they’re made-up?) to see what that would look like more. And included my *NET* income in one of the calculations too. You know, to make it more real.
And here’s how all that looks like, as compared to the normal DTI ratio:
- Normal debt-to-income ratio: 19.4%
- Expenses-to-Income Ratio: 55% ($5,500/$10,000’ish)
- Expenses-to-NET-Income Ratio: 78.5% ($5,500/$7,000’ish)
How different and scarier! Haha… Whose idea was this again?? Though I’m also running MY numbers here for income without the wife’s AND including our *total* expenses for both our lives too – so these numbers are certainly skewed. But you can still see where we’re going with all this stuff… Even with low debts you can still carry high expenses!
So that’s what I learned over the weekend… Wanna run the numbers yourself and see what YOUR debt-to-income ratio is? You can just do the normal one unless you get excited about running the more hardcore ones like I did ;) Both routes paint an interesting picture of how you’re managing your money either way!
I’ll keep you updated on the final results of my refinancing idea too… We’re getting closer to some answers of what we’re planning on doing, but I still have a lot more to research. This is the part my A.D.D. really likes to get in the way of ;) We sure don’t like details all that much! Haha…
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[Photo by the great 8. Edited by J$.]
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61.5%. That would be ok for someone in their 20s or 30s with a big mortgage but I am in my late 40s and I have debt. $20,800 debt divided by $33,800 net income = 61.5 %.
The Canadian government just released results for the country and the average is 164.6%. There are a lot of Canadians who are drowning in debt and will never escape. When you consider how many people have NO debt that means some people have numbers in the 200%, 300% and higher. Ouch.
Ouch indeed!! And actually your DTI should be better anyways because you were using your NET income over GROSS which you’re supposed to do :) So I’d reckon your true DTI to be around 35-40%! (though I personally like running the numbers with *net* since it’s more real-life)
I believe you’re using your total debt load and your total annual income, rather than your monthly minimum debt payments and your monthly income. And, as J. Money points out below, use gross income rather than net.
On the other hand, if your numbers are accurate and you’re paying $20,800 a month in debt service and making $33,800 a month in net income…Well, that’s not too shabby! Even with your 61% debt load you’ve still got $13,000 a month in net income for all of your living expenses excluding debt service!
Hah! Heck yeah that would be awesome! :) And then my next question would be on where all those expenses are coming from each month?
After paying off my car loan last year, my ratio is a big, fat, zero! :-)
NICE!!! Way to go!!!
I’m assuming that you don’t include the escrow portion of your mortgage and you take your gross pay.
If those assumptions are correct, then mine is about 15% (I have no debt other than my mortgage)
Small world too, J$. I just began a refinance of my castle.
I got a “no cost” 15 year fixed at 2.875% Which’ll save me about $20K in interest! Hot damn! :))
Woahhhh look at you rock it!! I can only WISH to get a deal like that, my friend! Way to go!! And you’re assumptions with “gross” is correct up there, although I think escrow DOES count too – but I could be wrong about that… I did include it in my DTI numbers.
Ok, with the escrow it is 17.7% still good.
I don’t care what Ramsey says about not needing a FICO credit score. Having a high one ROCKs when you are looking for a loan! :) Good luck on your refi.
Oh, for sure! I think the people who say you don’t need a FICO score are those who are planning on paying straight up cash for everything. Which, if they can pull off is pretty incredible, but for most people it’s kinda far out there… So we need our good credit scores :)
27.1% – Higher than I’d really like, but well within that 35% threshold! Assuming we don’t have to take out any additional loans in the next 4-5 years, and even just assuming our income stays static, car loans and my student loans will be paid off and that ration goes to 20.1%.
But it’s early and I don’t have the time/brain power to figure out those other ratios at the moment. All I know is that we have a decent amount of flexibility built into our budget and can reduce our expenses should we need too. We usually shoot to put about 20% of net income into savings of some sort, so our actual expense to net income is probably around 80%, but that includes all our discretionary spending, it’s not all living expenses. We probably follow pretty closely to the 50-30-20 rule, now that I think about it, although that ration might be closer to 60-20-20 if I did the math. Still not too bad though!
Not bad at all :) The important thing is that you have a good grasp on all this stuff so you can make decisions a lot easier/faster knowing all the numbers like you do. That’s something that makes sense if you think about it, but unfortunately a lot of people don’t even have a solid idea of where their money is truly going :(
Mine is well below 20%! Of course all I have for debt is my small mortgage and hopefully when we get married (my girlfriend and I) all of her student loan debt will be gone. Once we add her income in it SHOULD go even lower, below 10%! If we end up making a financial move we have in mind after she’s out of debt it would likely increase to around 20-25%.
Oh I forgot about escrow. I included that. If I took out my escrow it’d be even less!
you’re on a great path, sir! And Mrs!
Our debt to income ratio is 4.7%. I’ll take it!
It will be getting a little high this summer since we have a couple remodel projects that are probably going to cost us some cash and we will need a HELOC to help cover them.
Sucks your Chase reps are being a little difficult. If you were in my neck of the woods I’d introduce you to my rep. He is very responsive and works very hard for everyone I have refered to him.
I would take you up on that in a second too, believe me… These reps over at Chase have no customer service skills whatsoever, it’s maddening. And I rarely complain about stuff like this so you KNOW it must be bad :(
38.3% :( I’m so close to that good category! Keep. Aggressively. Paying. Debt. OMG It makes me so tired.
Well just remember it’s ONLY A PHASE!! Once that $hit is gone, it’s gone :) And live becomes all candy and rainbows! Haha… Candy. And. Rainbows.
Right now, we’re at 24%. When we pay off car off in a few months, we’ll be at 21%. Not bad but we’re working toward a big, fat 0%
Yup! Always gotta be working towards a goal whatever that may look like :) No time to take it easy until things are REALLY on the up and up.
0% when calculated this way – I have student loans but they are in deferment. I assume lenders also looks at total outstanding debt, not just monthly payments?
For sure. I just don’t know the down and dirty details really, outside of this latest call into them at least… The cleaner and less-debt you have will always help for sure.
Mine is running at 21.6%. This is much better than what it was even last year at this time. I believe it was close to 65%. I hope to have it down to about 15% sooner rather than later. Nice post J Money.
Thanks man :) Feel free to steal the idea and run it on your blog too! Would be interesting to see how your audience’s numbers look like, eh?
14.75%, baby!! OWWW!! You’re right, though, J….this doesn’t happen overnight, and not without sacrifices. We don’t have auto loans, so we drive some toe-up cars, we pay off our credit cards every month, so no minimum payments. The only debt we have is the mortgage…and we’re planning on taking on another (hopefully) soon…so that will be interesting.
Oh yeah? Like an investment property of some sort, or a vacation home? The thought of taking out another mortgage just gives me a headache, haha… but financially it makes sense if you can turn it into a revenue producing venture! Not so much w/ the vacation home ;)
Um, not a vacay home…I’ll email ya…interesting things happenin’ with the Schley-ers! ;)
well my DTI ratio is 2% but i dont have a house/mortgage, so if i include rent into this equation then it goes up to 19%.
J Money, also, i wanted to ask about your refinancing plan and if you take into account the future value of a dollar when you decide whether or not to refinance since each dollar today is worth more than the dollars you would save in the future, if you ran those numbers would it be worth it? i only say that because the bank wouldnt offer it unless they thought they were getting something more valuable.
That’s a great (and deeper) question my friend, I like it ;) And honestly, my gut answer here is that no – it doesn’t matter at all to me. I know money devalues over time, and a million dollars isn’t a million dollars in 20 years/etc, but I like to keep things simple and just go on what I have on today. If I were to start thinking about that stuff it would probably make more sense to just start *investing* all my money going forward an never paying off any debts/etc, which I just can’t handle, haha… To me it’s all about going with what feels *good* at the time and running with it. If things change down the line, I just re-evaluate and go from there :) Does that kinda answer your question?
Great post, makes me think of things in a new light.
Since we only have our mortgage left, without escrow costs our monthly payment is only $525. Net income about $7,500/month… so only 7% WOOT! But if you go with net, its more like 9.5%. And if you add in escrow its a more normal figure of 15%.
Working aggressively to get this down to 0% by the end of 2014.
That would be a dream plan! 0% DTI, baby – you can do it!!
HEy J. this is a great financial wake up call for people who want to eventually buy a house in the future. PITI is principle interest taxes and insurance- This is the calculation that is done to qualify people for a mortgage. Then this figure is included in the total debt to income ratio. By the way mine is 13%, not including my rent payment. I tend to sway on the side of not including rent because it is technically not a loan. When I am finally ready to buy my home I will have all my debts paid off before hand or at the closing.
That’s a great goal to have, my friend! And you’d be a lot more prepared going that route than most of us when we signed on those dotted lines too :) Keep it up, homeboy.
As a single guy with his student loans paid off, living in the city with no car, and renting an apartment (no mortgage), I’m happy to say that my DTI is currently 0.0%! (Right?)
Of course, when it comes time to move out of NYC, the mortgage payment will come calling, and possibly — but hopefully not — a car payment :(
Haha… yes, but then you’d be living a pretty sweet a$$ life in NYC too I bet! Especially as a single guy – I had a blast when living there back in the day :) Always something to do and someone to meet. I kinda miss it…
Remember to exclude any installment debt with less than ten months remaining! Lenders typically don’t count those obligations against you. And, if you’re trying to qualify for a mortgage and you don’t want the installment debt to count in your DTI, pay it down to less than ten months remaining BEFORE they pull your credit (at least 90 days out), since you cannot pay off debt for the purposes of qualifying.
Also, lenders use the payment reported on the credit report, not the minimum payment on your statements, so when qualifying for a mortgage, make certain you make exactly the minimum payment (and no more) at least ninety days before the lender pulls your credit! If you want to make additional payments, verify the creditor will not report those payments (they typically do, because it’s an automated system that just records payments made). Paying more than the minimum can hurt you at qualifying time. You can always dispute the payments the lender used for your DTI, but since they don’t have to disclose that information, you may never know that $250 you paid Kohl’s was used as a minimum, when you actually made a giant reduction in the balance in an effort to pay it off!
Wowww, such GOOD information to keep in mind, jeez! So crazy how all these things work behind the scenes that most of us will never know. I pay off way more than our minimums on our two mortgages every single month, so if we get more serious about the Refi Plan then I’ll have to stop for 90 days so it doesn’t get reported/etc like you said… We can always use that cash for closing anyways, so it’s not the biggest deal in the world.
Thanks for always sending me over these tips!! And for posting this up in the comments here for everyone too – not everyone sees the emails you send me with all these details :) They’re great.
I’m not sure my math is right, but the only debt we have is a mortgage. Monthly payments are $1,035 after our refinance including escrow. We pull in just over $18k per month gross.
1035/18000=.0575
Yup! Nice! $18k a month gross is incredible – way to get that income going like that!
Hey, do you include your Roth IRA contributions and other savings in the Expenses-to-Income calculator?
Nope. Only the debts that are mandatory (but I would in the other calculations I came up with there after the DTI just for my own personal knowledge :)). I’m 99.9% sure that your savings/contributions aren’t reported in the normal DTI though.
I’ve never thought about any of those numbers before. We don’t have a mortgage yet, but when we get one, we will definitely take into account what it will bring our debt to income ratio to.
And the expenses to income ratio is super interesting! I think Husband and I will calculate that tonight when he gets home from work. I’m sure there’s room for improvement!
Yeah, do it! And the blog about it too :) Two for one special!
Another pro of running the numbers is that you also find out how much *leftover* you have every month too, which I always find interesting. That becomes the main difference in growth over all the future years, so the bigger those #s are the better! (At least if you’re actually applying it towards debt/savings/investments/etc)
Great post sir! I think too often many of us do not think about our DTI, and many also think it’s of little importance. Last I ran ours we were just a bit below 20% as the only debt we have is our mortgage.
I have seen the expenses to net income ratio before as well, and honestly I need to run ours again. Last I did, I believe we came in around 70%…give or take 5%
Oh yeah, all these numbers really help put things in perspective no matter what they come out to be. And plus they’re fun to just track and look at too – cuz we’re big finance nerds!! :)
Rough and dirty: mortgage + car loan = 14% If it was a year ago (no car loan but lower income), it would have been something like 10%
I try to stay below 30% of my net income. Haven’t calculated it in a while though, thanks for the reminder!
9%, oh yeah. it’s been a ridiculously hard road to this point but it’s great. All we have left is the mortgage but the rate is so low paying it off just isn’t justifiable.
I’m jealous :)
This was the easiest calculation I’ve done in awhile! I’m rocking 0% :)
It took 3 1/2 years of real sacrifice to get to zero but it was worth it! Eventually it’ll go up once we get a mortgage but I intend to pay off the future mortgage very quickly.
Hey J Money, have you considered a bit of a reversal? Your Savings Rate Percentage?
This is just your saved money / your total after tax income. I count money put towards your mortgage as savings as once the house is paid off it WILL be savings and we have been running on a Savings Rate of about 70%.
ooooh nice! I like that one :) I ran something similar years back when I first started this blog, but it’s def. been a while since then. I’m gonna make a note to do so later and possibly blog about it too, hehe… thx for the idea!
Do you know what yours is btw?
Dude…19% is pretty sweet…congrats to you!! I have moved from 65% down to 40%. With rental properties that’s as good as I am going to get for a bit!!! Keep up the awesome posts…
Mine is 27% and will soon be 22%.
As a fun fact, when I bought my house, the first mortgage lender I talked to said he would qualify me for a mortgage amount that would make my DTI 50%–completely crazy.
Jeez!!! That’s what got us INTO this whole real estate mess! Good for you on keeping things more real over there… At least I assumed you did? haha…
I don’t see why rent is a factor, unless you obligated to pay for a certain amount of time, but it doen’t involve interest. Whatev, 4% on it’s way down to 0% bitches lol… April 30 is my deadline for NO MORE DEBT!!!!!!!!
Yeah bitches!
Most government loan programs count daycare costs as an obligations (as well as utilities). If you’re considering an FHA, VA or other government program, ask what expenses go into the ratios, and how they’re calculated. Sometimes less attractive conventional financing can be easier to qualify for. Ask a lot of questions, ask to see the numbers that are going into the calculations, and don’t be afraid to speak up if something doesn’t look right.
Back door deals like free of charge day care or dramatically reduced rent can be real issues when qualifying for a mortgage, make certain you work with a trustworthy industry professional, and disclose everything. If you don’t like the outcome, find out where you need to make changes before trying again.
Also, a debt being retired by the refinance that is secured by the subject property does not go into the DTI, i.e. the payment on that second lien you’re paying off, whether you pay more than the minimum or not, will not go into your new DTI because the obligation will no longer exist. On the other hand, whether you pay off that Macy’s bill or not, if it’s on your credit report, you’ll be hit for the payment.
Property taxes and homeowners’ insurance premiums go into the calculations, so make sure you count them in your own! HOA dues count as well, and while HOA dues once cancelled out insurance, these days, particularly for condominiums and attached PUD’s, you must carry a homeowners’ policy in addition to the blanket coverage the HOA holds (that you pay for through the HOA dues). All home related expenses go into your “top” or housing ratio, all other debt goes into your “bottom” or “back end” ratio.
When purchasing, lenders use the traditional calculations for estimated property taxes and property insurance (rather than actual if you already own the property), and those amounts change, so check with your lender on what they’ll be using so you know where you are. Whether those calculations are accurate or not, the industry has guidelines that must be followed, so do your homework to avoid disappointment.
When considering debt payoff for the purposes of qualifying (done in advance of having your credit pulled, of course), calculate the biggest bang for your bucks by comparing which debts could be paid down and/or off for the least amount of money, and how much that would affect your DTI. Frequently, due to some obligations having much higher minimum payments than others, it makes sense to pay off a debt you would have carried (or carry a debt you would have paid off) when thinking about purchasing a home or refinancing. Run the numbers as a lender would, so you can make an informed decision!
Finally, remember that life is timing and you are more than your DTI. If things don’t look great right now, take the steps necessary to improve your situation and look again in three months. Paying at least the minimum, paying on time, and not increasing your debt will increase your scores, which will make qualifying that much easier whenever it feels right for you.
YES! Well said, my friend!! And thanks for all this info again – it’s awesome having someone here with the background and experience to highlight this stuff for us! As the people on the other end of the phone talking to us have no idea!! Or they choose not to say ;) So thanks!!
If you can’t measure something, you can’t control it. Props to you for running the numbers. My DTI is currently 0% Or some tiny percent if I decided to pay the minimum on my credit card instead of paying off in full every month. My Exepenses to NET income ratio is 50%. I’m aggressively saving and investing with the hope of becoming financially independent by the time I’m 45.
I like that plan. I hope to join you on whatever retirement island you’re on when I’m 45 too :)
Our DTI is at 24% because I’m currently out of work and my wife’s hours were cut. She used to average 38 and now they have here down to around 32. It will get better we close on our house next month. Our Expenses to net income is similar to ours. Granted, I’m only making $600/month out of work, but our ratio is 78% Both of those numbers feel horrible, however.
Well you’re in a specific situation at the moment so we can’t count that :) It’ll be back on track and normal once employment picks back up for you guys! I’ve got total faith – you’re always finding ways to hustle, haha…
Mine was zero up until last spring when we bought out condo. Now I’m going to have to do mine and bf’s to see where we’re at. Thankfully the mortgage is the only debt either of us has.
Keep in mind that for a mortgage situation, it’s not quite this simple. The debt part is everything that shows up on your credit report, including any loans you’ve cosigned for but don’t pay on (a kid’s car, or student loans), and minimum payments for credit cards that you may pay off monthly. (So if you do all of your shopping on a credit card for reward points and pay if off monthly, effectively spending only cash, this credit use will be counted against your DTI ratio.)
Valid income is only pre-tax income that is guaranteed by contract or has been on your tax returns for two years. If your income has been declining or fluctuating (i.e. self employment, commission, or tips), you must use the average of two years income from your tax returns, and declining income almost always eliminates that income source from consideration. Generally, depreciation won’t be counted back in, and any business losses will get counted against your income regardless of what you pay yourself. And god help you if you get dividend income. I’ve seen multi-millionaires get denied for small loans because their income comes from investments and isn’t considered reliable.
May I ask what rate you’ve been offered? Last I checked, Chase was far from the best on the market.
Wowww good info!! Thank you!! Crazy about the millionaire stuff, I bet it gets wild with that!
RE: rate I’ve been offered – I haven’t gone much farther than asking for info and seeing what my options are, but I’d hope it would be around 3-3.5% or else the whole refinancing starts not looking as good with this new plan of mine… Though I’d probably still take it ;)
Wow, 19.4% is an awesome DTI ratio. Mine is 27% but I am working on decreasing it significantly but seeing that I am still in the green zone made me a little more comfortable.
I’m at 8% for my 3 remaining debts, and 20% if I include my fiance’s car since I am the cosigner. I hope to be at 0 for myself by this summer!!
Awesome!! That sounds fantastic :)
I just calculated mine and I am at like 33%. I can pay off some bills and get it down to 27% by October.
I am 30 years old, and want a new car. Probably bring 10K cash in January to buy it but it would move me back up to 33% (this includes expenses gross).
The only debts that would make up the 33% in January would be Car+Mortgage. I have no student loans…
Kind of confused because I did some calculations and I can put away about 20K a year towards my mortgage. If I pay about 40K (2 years worth) at this rate and do not get the car i won’t have to pay Mortgage insurance (i am a new home owner) and that would drop my monthly payment roughly from 1870 to 1570…
I am at a crossroad I have a car that will make it another 2-3 years (has 110K miles on it) but I am 30 and want a v8 camaro (lol)…I can probably get to 200K miles on it I did all the scheduled maintenance on it and that cost like 2K…
I am also single, so don’t know how my ratios would do if I got into a serious relationship and got married with a second earner earning something around me with just maybe school and car loan debt…
Any advice for this single bachelor? hahaha
If I wait any longer I could end up driving a Prius! – lock in jan. with a 1.74% 5 year loan from my local credit union…
my credit is 720+…
Nice man! You seem to be doing well over there :) I hear ya about wanting to upgrade cars too – I get in that mood every two years or so, haha… it’s tough to hold back! But really at the end of the day it’s just a matter of priorities and what’ll make you happiest. Is it paying off more mortgage and possibly saving more later? Or rockin’ out in your new car around town every time you jump in? No right or wrong answers in my opinion – just a matter of weighing pros and cons and then choosing one. Or maybe even waiting a year and *then* making a decision? It can be hard having a nice balance between going the financially smart route vs the “being happier now” one :) Good luck!