This blog post is a continuation of RPM East Valley’s prior posting, “Boosting Investment Power, Part One: Credit Score”. This discussion includes methods for clients both current and future to strengthen their monetary prowess. To read the introduction and what has been written so far, click here.
One of the most fundamentally essential factors of investment power is the proportion of debt one has occurred in comparison to the amount of money they bring in. Many assume that if income is high, it’s an automatic green light for investing, but if the amount of debit against the credit is substantial, that can stall progress on a real estate venture.
Using a fictitious character, Jim, we’ll demonstrate how to calculate your Debt-to-Income Ratio:
Let’s presume that Jim has worked a steady job for a long time, has climbed the ladder a ways, and makes $7,000 per month. This constitutes his ‘Income’. However, the ‘Debt’ portion of the ratio refers not to the sum accrued amount of debt, but to the total monthly payments he is required to make.
Here are Jim’s monthly bills: $2,000 mortgage, two $350 car payments, $400 in student loans, and $500 in credit card payments. The math would calculate as follows:
Total Monthly Payments ($3,600) divided by Total Monthly Income ($7,000) equals 0.5142,which translates to:
51.4% Debt-to-Income Ratio.
The general rule of thumb is a desirable DTI Ratio is less than 50%, obviously the lower the better. Jim’s example goes to show that although one’s income may be high, if debts are also high, lenders and investors will become aware of that, and will factor into one’s ability to utilize real estate.