Debt to income ratio

[BOSSHOG]

Read in a magazine that your debt to income ratio should be 40.% What does that mean? If someone had an income of $100,000 what would the prescribed debt ratio be at 40%? Our debt is virtually non existent but I don't understand the above. Any help would be greatly appreciated.

[DJ13]

1. 40% of $100,000 would be a debt level of $40,000

Of course that $40,000 is total debt, and the $100,000 is yearly income, so that 40% while large, isnt debilitating over the long term.

[BOSSHOG]

2. I thought that

and rechecked the article and it mentioned "total debt." I don't understand that because families who make a 100K a year may have a 200K mortgage plus various and asundry other debt above that. I'll just stick with the basics, debt bad, savings good.

[DJ13]

4. Mortgages are included, but as they are amortized over decades only the yearly total counts

Say you pay $12,000 per year on your mortgage, that would leave an additional $28,000 total debt you could carry year to year to remain at the 40% debt to income level @ $100,000 income per year.

[gcomeau]

7. That's how I run things...

I'll just stick with the basics, debt bad, savings good.

I determined at a very young age that there were exactly three things I had any business going into debt for.

1. School.
2. Vehicle.
3. Home.

End of list. Anything else, if you can't afford to pay for it you have no freaking business owning it. (Possible exception, start-up capital for a business... provided you have a decent business plan and have actually done your research)

I went into debt paying for school, graduated, spent the next several years paying off my loans way ahead of schedule. THEN I went back into debt to buy my first car, just finished paying that off several years ahead of schedule. Next I'll go into debt to buy a house when I think the housing market has finished bottoming out and that's it for me as far as spending money I don't already have... and you can bet I'm going to be throwing additional money I come across toward paying that off ahead of schedule too.

[XNASA]

3. There are different kinds of debt.

One is credit card, car loans, etc. Sometimes people don't have a lot of that kind of debt. If they're lucky.

The other type that gets forgotten is housing. Rent, mortgage, property taxes, insurance...things like that. Usually, that kind of debt is unavoidable...and recurring.

[Warpy]

5. It means none of us should ever be able to buy a home

since the average house is several times the yearly income.

Perhaps a wiser way would be to say that a mortgage should never exceed 35% of income and other debts should never exceed 5%.

Again, it restricts those of us of modest means to used cars, but we should probably do that anyway. I always did.

Then again, it also fails to account for student debt.

Face it, there is no way for most people to meet this silly formula since our wages have been so depressed for so long. Instead of paying our way through school, we had to go into debt. Instead of saving for a new car, we had to go into debt when the old car wore out. Instead of saving for a house, we had to scrape together enough for down payment and closing costs and then go into debt. The same thing goes for other expenses like a new roof or a major plumbing repair.

This is what I mean about having to supplement inadequate wages with easy access to credit. It's been going on too damn long and the classic asset to debt ratio just doesn't work any more.

[Fresh_Start]

6. Its not based on total debt

its based on your monthly obligations.

For most people, their mortgage is more than they earn in a year. But the payments on the mortgage are hopefully less than they earn in a year.

40% would be highly leveraged (not a good thing) it would be at the very high end for qualifying for a loan. Typically higher income people can afford a higher ratio because their living expenses food, utilities, transportation are a lower percentage of their income.

here's a simple calculator
http://www.usnews.com/usnews/biztech/tools/modebtratio.htm

[BOSSHOG]

9. Thanks very much

for turning the lightbulb on in my head. That makes sense.

[One_Life_To_Give]

8. Debt or Debt payment ratio?

Having total debt payments at 40% of income is quite substantial. I thought the numbers were up to 28% for the mortgage and up to 34% total. That is for a household with a gross of $100k/yr a mortgage of $28k/yr ($2330/mo) with a miximum of mortgage/credit cards/car combined of $34k/yr ($2830/mo) {Or $500/mo for Car payment/credit card debt)

[damntexdem]

10. How about a doubt to income ratio?

Of course, after 8 years of Bushista rule, we'd all be in financial ruin. Wait, we are!

[sallylou666]

11. Medical expenses

Medical expenses can easily push you into the too much debt category. It sucks.

[davidwparker]

12. Simple: Avoid debt.

I was out of debt until last year and then did some home improvement. Mistake.

I should have lived with it, saved, and then spent cash. For big ticket items like a house or a car, maybe. For everything else, save.

This is my lesson learned from our flirtation with a deep recession or depression, depending on which part of the country you inhabit.

[Adsos Letter]

13. We came in at 16%, a figured from the calculator linked in one of the above posts...

I don't feel too bad about that.

[PassingFair]

14. Mine is 17%...but I don't feel too cocky about it.

If I lose my job, we're sunk.

If I get sick, we're sunk.

I found this quote about the Depression:

"Reckless fools lost first because they
deserved to lose, and careful, wise men
lost later because a world-wide earthquake
doesn't ask for personal references."

--Edwin LeFevre

[notesdev]

15. Probably talking mortgage standards

The traditional mortgage lending standard is 32% loan-payments-to-income, 36% all-debt-payments-to-income ratio. 40% is too high. A big part of the real estate bubble phenomenon is due to this standard being discarded - yet risk was still calculated as if it were adhered to.