| So you find you have managed to scrimp and save | | | | have low monthly debt payments. Your ability to |
| some money for a down payment on a house, have | | | | qualify for a mortgage loan is unique to your particular |
| paid off your vehicle, and you also have found you | | | | financial situation. That's why lenders look at this |
| have enough surplus monthly income for a new car | | | | number just as closely as your FICO score. |
| payment. If you are in this position, and your vehicle | | | | To calculate your debt-to-income ratio, add up all of |
| can still manage to incur a few thousand more miles | | | | your monthly debt obligations-often called recurring |
| consider holding off on the purchase of a new car. | | | | debt-including your mortgage (principal, interest, taxes, |
| You may ask, "Why is this advisable?" The reason is | | | | and insurance) and home equity loan payments, car |
| that most first-time homebuyers, and some veterans, | | | | loans, student loans, your minimum monthly payments |
| do not know that your new car payment will directly | | | | on any credit card debt, and any other recurring loan |
| affect your debt-to-income ratio. | | | | payments you might have. Do not include expenses |
| Suppose for illustration sake, you had purchased the | | | | such as groceries, utilities and gas. Take this total and |
| new car and you contact a loan officer to get | | | | divide it by your gross income from all sources. If you |
| pre-qualified for a mortgage loan. You state your | | | | want to try your hand at a debt-to-income ratio |
| desired price and how much you have managed to | | | | calculator, go to which has a great online tool to help |
| scrimp and save for the down payment. You provide | | | | you figure out your debt-to-income ratio. |
| your income and may even supply pay stubs and W2 | | | | Let's say you and your spouse together earn $60,000 |
| forms. The loan officer methodically crunches the | | | | per year or $5,000 per month. Your total mortgage |
| numbers (by telephone, in person, or even over the | | | | payment is $1,100 your car loan totals $400, your |
| internet). And the loan officer promptly lets you know | | | | minimum credit card payments are $150 and your |
| that you would have qualified for a higher home sales | | | | student loans add up to $100. That equals a recurring |
| price if you didn't have "that expensive car payment!" | | | | debt of $1,750 a month. Divide the $1,750 by $5,000 |
| You see, when determining your ability to qualify for a | | | | and you'll find your DTI is 35 percent. |
| mortgage, in addition to your three-digit credit score a | | | | In general, you'll want to keep that number below 36 |
| lender looks at what is called your "debt-to-income" | | | | percent-a threshold that loan officers and credit card |
| ratio. | | | | issuers often use as a factor when they determine |
| A debt-to-income ratio is the percentage of your | | | | how much they're willing to lend you. If you go higher |
| gross monthly income (before taxes) that you spend | | | | than the above mentioned number, you may be able |
| on debt. This will include your monthly housing costs, | | | | to qualify for a loan but usually at higher interest rates |
| including principal, interest, taxes, insurance, and | | | | and therefore higher monthly payments. The higher |
| homeowner's association fees, if any. It will also include | | | | your DTI number, the riskier it is for lenders to offer |
| your monthly consumer debt, including credit cards, | | | | you loans-and the more they'll make you pay for them. |
| student loans, installment debt, and of course, car | | | | Looking back at our example, suppose you earn |
| payments. Your debt-to-income ratio is the amount of | | | | $5000 a month and you have a car payment of $400. |
| debt you have in the form of mortgages, car loans, | | | | Using an interest rate of 8.0%, you would qualify for a |
| student loans and credit card debt, as compared to | | | | mortgage loan that was approximately $55,000 less |
| your overall income. | | | | than if you did not have that new car payment. Are |
| You might ask, "Why is this number so important? I | | | | you seeing the importance of holding off on that new |
| make a good income and I'm never late on my | | | | car? |
| monthly payments, well only occasionally." What it | | | | So, if you have not already bought a new car, and |
| comes down to is the amount of debt you have to | | | | your old one can still take a few thousand more miles, |
| pay on a monthly basis relative to your monthly | | | | try to qualify for the home first which as an |
| income. You may bring in a hefty paycheck but have | | | | appreciating asset will bring you great tax savings, as |
| equally hefty debt payments which could be a | | | | well as a place to live in. You can forgo that "new car |
| problem. Or you may make a modest income but | | | | smell" for another time! |