What is the Debt to Income Ratio?

What is debt to income ratio? How is it calculated for USDA guidelines? And what the max ratios? All great questions!

1. What is debt to income ratio? It is the amount of debt compared to your income. There are 2 separate parts. Front end and back end. Front end is the expense of the home (taxes, insurance, principal, interest, homeowner’s association due) compared to your income. Now, the back end, is all reoccurring debts combined compared to your income. This includes anything that reports to the credit bueros. However, it does exclude your alternate tradelines such as utilities and car insurance.
2. It is calculated in a few different ways. In most cases, we would calculate your income using your hourly or salary as a base. If you have been there for 2 years, we could include your bonuses and overtime. If not, it is good to play it safe and not include OT and bonus unless you have been in the same field for over 2 years. Then, we would add up all minimum payments on debt owed and compare it to your income. Now, you very well might have some student loans that are deferred, meaning you have no monthly payment. In this case, we would count 1% of the amount owed. Many times, you can work with the company to get on a payment plan for less than the 1% owed. Also, we can exclude any debt (besides revolving accounts) that has less than 6 payments left.
3. The max debt to income ratio for someone with a midscore below 650 is 28.99/40.99. The max for someone over 650, is 33.99/45.99.

Go ahead and try it on your own so you have a good idea of what it is! Then call us and we can compare calculations! J