Debt-to-income ratio is a crucial aspect of personal finance, but what does it mean exactly? Your debt-to-income ratio is the total amount of your monthly debt payments divided by your monthly gross income.
For example, if your gross income per month is $5,000, but you have a $2,500 monthly mortgage payment, your debt-to-income ratio would be 50 percent: $2,500 of debt divided by $5,000 of gross income. Use this calculator to determine your debt-to-income ratio.
Why does your debt-to-income ratio matter, and why can marriage improve it? Debt-to-income ratios are key criteria for banks when they consider lending money to you. In mortgage lending, for example, banks have learned that borrowers with high debt-to-income ratios carry a greater risk of not being able to make the monthly payments.
When you marry someone, you’re essentially adding another income stream. With two incomes plus little to zero debt between you and your partner, your debt-to-income ratio goes down substantially. Getting a mortgage loan still depends on a variety of other factors as well, such as your credit score. But a better debt-to-income ratio can help you and your spouse afford your dream house.
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