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Your debt to income ratio

Posted March 26, 2014 in Altoona, Advice Column, Pleasant Hill

What does “debt to income” mean? How much do you owe versus how much do you have coming in for income, that you claim on your taxes? That last part, claiming on your taxes, if you are paid in cash and you cannot document your income with your W2 or 1099 forms, you cannot claim the cash as income if you cannot prove it. Also, if you own your own business and your write off all or most of your income on your taxes then you, too, cannot claim that as income for your debt to income.   If a business owner leaves himself $5,000 gross income at the end of the year on his taxes after writing all other income off due to the expenses of his business, then the only income that can be claimed is that $5,000.

Debt to Income: You have $500 in total bills that you pay out monthly. If in those bills you have credit cards, only the minimum payment is  being counted, not the total payoff if you pay off your cards monthly.
Car payment    $300
Credit Card    $  50
Student loan    $  50
Bank Loan    $100
Total debt    $500

On your credit report. Cell phone, utilities, electric and water are not included

New home expense
You are purchasing a $50,000 home and putting a $2,500 down payment on your purchase. Your new loan amount of your new home is $47,500. Total  house payment $417.60 (includes taxes, insurance and mortgage insurance).

$2,800 monthly gross income. Gross income is before taxes and insurance come out of your paycheck.

DTI or Debt to Income
$500 Expenses + New Home Payment $417.60 = $917.60 expenses divided by income of $2,800 equals your total debt to income ratio of 33 percent.

This is a simplified example. Total debt to income is allowed to go as high as 43 percent. But this is one of the scenarios to consider when you want to figure out how much house you can afford comfortably based on your income and your debt. Check with your tax representative for correct income numbers to use as well. Home loan calculators are available online to figure house payments and variables of payments and taxes and insurance.

Information provided by Lori Slings, Valley Bank, 160 Adventureland Drive, Suite H, Altoona, I(515) 967-4700

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