Debt to income ratio: Its Basic and Types

If you are planning to avail a new loan, it is important that you check your debt to income ratio. Lenders can also ask for debt to income ratio before offering funds, to ensure that the borrower will be able to repay the loan amount.

What is debt to income ratio?

Debt to income ratio is an estimate in which the percentage of a person’s monthly gross income is calculated that is used in paying debts, certain taxes, fees, premiums and more. This calculation not only helps the borrower to keep a track of his budget but also allows the lender to understand if the borrower will be able to pay back the loan money.

What are the types of debt to income ratio?

There are 2 types of debt to income ratio: front ratio and back ratio. Front ratio means calculating the percentage of an individual’s monthly income that is used in paying house rents, mortgage loans, insurance premiums, property taxes etc. On the other hand, back ratio means the percentage of monthly income that is used in paying debts, credit cards, child support payments, alimony and legal matters.

What is the need of DTI?

Debt to income ratio is equally important as the credit score. It helps consumers to maintain a monthly budget according to his income and expenditures. In this way, it becomes easier for the consumer to repay his debts systematically. If an individual’s DTI ratio is higher, it means he has more debt payments to make.

Calculating your debt to income ratio is easy. Follow the 3 steps given below to know your DTI ratio:

• Add up your net monthly income
• Add up the total amount you pay for debts every month
• Divide the debt amount by the income amount and you get your DTI ratio

As you know your DRI ratio, implement a proper budget accordingly and lead a stress free life.