Whenever you’ll approach some banks or financial institutions to take out a loan, the creditor/lender will at first analyze whether or not to offer you the loan. With the help of debt-to-income ratio, a personal finance measure, the lender will compare the amount of money you earn to the percent of your income used to make your debt payments. It acts as an indicator that helps the lender to know whether or not you’ll be able to repay on time if your credit limit is extended. 

Types of debt-to-income ratio:Read on to know about the two types of debt-to-income ratio. 

Housing expense ratio:It is a type of debt-to-income ratio often referred to as front-end ratio. It is used to determine the percentage of your income that you have allocated to pay your monthly housing expenses. However, the lenders have set certain limits termed as the desired levels that you should maintain to repay your debts. Usually the lenders will not offer you a loan if your housing expense exceeds 28% of your gross income. 

Long term debt ratio:Lenders use this type of debt-to-income ratio to determine the monthly amount spent on you’re overall debt payments. This will include your housing expenses, car loans, credit card debts etc. Here also lenders put a limit on the desired level of the long term debt ratio. Usually the lenders/creditors don’t offer you a loan if your back –end ratio is more than 36% of your gross monthly income.

Calculating your debt-to-income ratio:If you want to know your debt to income ratio, you have to add all your monthly debt obligations. This will include your mortgage and home equity loan payments, car loans, student loans, your minimum monthly payments on your unpaid credit card bills and any other loans you may have. If you calculate the total amount and divide it by your gross monthly income, you will know your DTI. You can even take the help of a debt-to-income ratio calculator to calculate your DTI. To work out the figures, you need to give out certain information such as, your recurring monthly debt and your gross monthly income, and you’ll get to know about your back-end ratio. Lastly, if you’re able to calculate your debt to income ratio, it will help you know whether or not you’ll be eligible to take out a loan or it would be better for you to wait until your finances are in a better position.