And do you care? ;) I recently had a conversation with two different reps over at Chase to investigate my brilliant refinancing idea some more (I didn’t go into details of course, just threw out some “what ifs”) and one of the things they kept bringing up over and over again was to “not mess with my debt-to-income ratio.” A term I’ve heard plenty of times before over my years, but one that I didn’t really pay attention too much. (Because really, when is that ever important??)
Well, apparently when you buy a house :) Or anything else that you need to take out a loan for (or when you’re trying to refinance stuff).
At first I kept ignoring Chase’s comments about it because they seemed more interested in being rude to me than answering my questions (seriously, both account reps were horrible – since when are you not allowed to ask about one of the most IMPORTANT purchases of your life??), but after a while I just said, “Look – my DTI (“debt-to-income”) is fine, let’s move on” and so we did…
Then it occurred to me that I’ve actually never ran the numbers before, and just assumed all would be golden – mainly cuz our finances are pretty good. Not to mention I wasn’t exactly sure what DTI meant thoroughly either? So I decided to bone up on it a bit more, and then run the calculations for myself. After all, how can I call myself a finance nerd if I don’t even know my DTI? :)
So, what IS a debt-to-income ratio?
Well, it’s pretty much exactly as it sounds: all your debts compared to your total income. Or more specifically, your total monthly debts (using minimum payments) divided by your total gross monthly income. So if you pay, let’s say, $300 a month for all your loans and you bring in $1,000 total a month (before taxes), your debt-to-income ratio would be 30% ($300/$1,000). Which is fairly healthy and normal for a person.
Here’s a scale I picked up from U.S. News and World Report on what these percentages mean:
- 36% or less: This is a healthy debt load to carry for most people.
- 37%-42%: Not bad, but start paring debt now before you get in real trouble.
- 43%-49%: Financial difficulties are probably imminent unless you take immediate action.
- 50% or more: Get professional help to aggressively reduce debt.
So I guess even if you *don’t* plan on taking out a loan anytime soon, it’s still a good idea to keep this stuff in mind anyways. Gives you a general sense of how well you’re managing your money all around.
MY debt-to-income ratio!
With all this in mind, I rand my own numbers to see how it would pan out. Thinking it would be worse than what I would have liked it to show, but also hoping for the best. And here’s what it looked like:
All monthly debts: $1,940 (Remember, you’re only doing minimum payments here)
- 1st Mortgage: $1850
- 2nd Mortgage: $90
All income: $10,000’ish (*gross*)
- All sites/projects/consulting/etc…
It’s probably best to separate all your income out to give yourself a better picture, but mine is scattered across tons of different areas so I just totaled them all up on avg to make things easier here.
MY DEBT-TO-INCOME RATIO: 19.4% ($1,940/$10,000’ish)
Not too shabby! So SUCK IT Chase reps ;) Of course I didn’t get to this point all overnight or anything – we’ve spent years getting ourselves on track and ridding ourselves of our car loans and credit card balances/etc – but it’s nevertheless a beautiful thing to see. And also bodes well for a refinance in the future too, at least in terms of not having to worry about our DTI if and when we go that route. (The other areas like being too much underwater/etc will be the sticky points)
How about Expenses-to-Income Ratio?
I also wondered to myself what our DTI would look like if we included all our EXPENSES in the mix too – not just our debts and loans. So I made up a couple new ratios (I think they’re made-up?) to see what that would look like more. And included my *NET* income in one of the calculations too. You know, to make it more real.
And here’s how all that looks like, as compared to the normal DTI ratio:
- Normal debt-to-income ratio: 19.4%
- Expenses-to-Income Ratio: 55% ($5,500/$10,000’ish)
- Expenses-to-NET-Income Ratio: 78.5% ($5,500/$7,000’ish)
How different and scarier! Haha… Whose idea was this again?? Though I’m also running MY numbers here for income without the wife’s AND including our *total* expenses for both our lives too – so these numbers are certainly skewed. But you can still see where we’re going with all this stuff… Even with low debts you can still carry high expenses!
So that’s what I learned over the weekend… Wanna run the numbers yourself and see what YOUR debt-to-income ratio is? You can just do the normal one unless you get excited about running the more hardcore ones like I did ;) Both routes paint an interesting picture of how you’re managing your money either way!
I’ll keep you updated on the final results of my refinancing idea too… We’re getting closer to some answers of what we’re planning on doing, but I still have a lot more to research. This is the part my A.D.D. really likes to get in the way of ;) We sure don’t like details all that much! Haha…
[Photo by the great 8. Edited by J$.]