Understanding Your Debt to Income Ratio
January 28th, 2010 by daphne reyes
Understanding Your Debt to Income Ratio
Firstly, you need to know what debt ratio is. Look at your monthly gross income, before taxes and contributions. This is how much you make per month, not how much you take home. What you take home is net income. Debt-to-income ratio is the percentage of a consumer’s monthly gross income that goes toward paying debts.
There are two kinds of debt to income ratio:
FRONT RATIO indicates the percentage of income that goes toward housing costs, which for renters is the rent amount and for homeowners is PITI (PITI includes mortgage principal and interest, mortgage insurance premium, hazard insurance premium, property taxes, and homeowners’ association dues.
BACK RATIO indicates the percentage of income that goes toward paying all recurring debt payments, including those covered by the first DTI, and other debts such as credit card payments, car loan payments, student loan payments, child support payments, alimony payments, and legal judgments.
