Article by Roger Schlueter, MBA
Personal Credit: Debt to Income is used by banks when an individual is borrowing on a personal basis. This money can be used for business but the person is borrowing personally for usually a car, boat, ATV, house or vacation property. House lending has so many federal regulations and regulations of the underwriters of the loan, that it is a discussion all by itself. What I will cover is a thumbnail of house loans and then more extensively all other consumer lending credit issues.
The Rule of thumb for Debt to Income for personal lending is a ratio. This ratio is obtained by taking the Total Debt (this amount may or may not include the new debt but it usually does include the new debt.) and dividing it by the Total Income of the individual or married couple. The Debt is the Payment per month or Year that an individual has and divide that by the Total Income of the Individual per month or year.
Example:
Joe has a mortgage payment of $1,000. He has a car loan with a payment of $300 as well as several credit cards with a combined payment of $500. Joe’s Total Monthly Debt Payments are $1,800. Joe’s Income per Month is approximately $5,000. His Debt to Income would be 36%. The bank would like the Debt to Income to be 40% or less including the Mortgage and 30% or less without a home mortgage.
Joe has a little room, approximately 4% of his income or $200 of which he can increase his Debt per month and be within the banks ratio of Debt to Income of 40%.
Now if Joe did not own his home and did not have a home mortgage then the ratio would be $800 divided by $5,000 or 16% and have approximately 14% of room to be within the banks 30% guidelines.
Most banks look at these as just that, a guideline. There can always be room for movement one way or the other. This is just a general guideline and banks may be higher or lower in the percentage of Debt to Income.
Please Email me with any questions or comments at roger@rogerschlueter.com or visit another of my websites at schlueterfinancial.com