With the prices of houses, cars and some consumer goods skyrocketing, many Minnesotans are looking to finance major purchases. While many factors affect a bank’s decision to loan money, your debt-to-income ratio may be too high to qualify for a loan or line of credit.
Your debt-to-income ratio compares how much debt you have relative to your gross monthly income. If you are struggling to pay your bills or are thinking about financing a house or car, you should probably calculate your debt-to-income ratio.
Add up your debt
To determine your debt-to-income ratio, you must first add together all your debt. When doing so, include your monthly rent or mortgage, alimony, child support, car loans, student loans and credit card payments. You do not have to include your groceries, utilities or taxes, however.
Find your gross monthly income
Your gross monthly income is the amount of money you make before your employer’s withholdings. If you have your monthly paystub, finding this figure is easy. If not, you may need to request a paystub from your company’s payroll processor.
Do some easy math
After you add up your monthly debts and find your gross monthly income, you should do some easy math to find your debt-to-income ratio. Simply divide your debt by the amount you earn each month. Then, move the decimal two places to the left to turn your quotient into a percentage.
While a debt-to-income ratio above 43% may make it difficult to secure a mortgage, lower ratios may also be problematic. Ultimately, if your debt-to-income ratio is interfering with your financial goals, it may be time to explore your options for debt relief.