Debt-to-income Ratio-non-profit Credit Counseling

Thinking of purchasing a big-ticket item soon? Maybe a new car, that fancy refrigerator you've had your eye on, or a home? Well, even if you've paid your bills on time and think you can swing the payments, you should also consider your debt-to-income ratio. Debt-to-income ratio is a ratio between a borrower's monthly payment obligations divided by his or her net effective income (FHA or VA loans) or gross monthly income (conventional loans). The exercise can be revealing, especially when you calculate this ratio regularly. However, waiting for a lender to do it can generate less-than-appealing results—if your debt-to-income ratio is too high, you will likely get a higher interest rate and you could even be turned down for the loan.

The ratio appears as a percentage—the percentage that the debt is to the income. A 30% ratio means you use 30% of your total gross monthly income (before taxes) to pay your monthly debts. The lower the ratio, the better your ability to qualify for loans. These guidelines differ depending on the lender with which you're dealing. In general:

• 35% or less: This is an average debt load for most people. If you keep your ratio around 15%, you're in great shape.
• 36%-42%: You need to start thinking on your spending habits and work on a plan to start eliminating some of your debt.
• 43%-49%: You are on the verge of getting into some major financial difficulties. Better act now before it’s too late.
• 50% or more: You may need to seek professional help to aggressively reduce your debt load. Professional non-profit credit counseling can help you with your debt and help bring your ratio to an acceptable figure. Your savings will go up and there will be a considerable decrease in your monthly payments.