Debt to Income Ratio: What it is and how it helps (or hurts) your chances of getting a loan

by Jason Dieter 8. August 2012

Debt to Income RatioSo, you’re trying to line up financing for that luxury car you’ve always wanted; or that new addition on the house your wife has been “gently” reminding you of; or how about the new sports boat to take the kids water skiing every other weekend? Well, in order to make any of these things happen, most of us turn to our friendly local bank to inquire about a loan to turn our dreams into a reality. Your average banker will often tell you that yes, they finance such requests as those mentioned above. All you have to do is fill out an application, then he or she will run your credit report and take a look at your DTI. This is where you stop and think to yourself, “I know what a credit score is, but what is this DTI they are referring to?”

What it is:

DTI stands for debt to income ratio. Okay, so what is debt to income ratio? Debt to income ratio is a personal finance measurement that compares the amount of money you earn to the amount of money you owe your creditors. Banks and lenders calculate how much debt their customers can take on before they may start having financial difficulties. The banks and lenders then use these calculations to set lending amounts before approving any new debt the customer is looking to take on. Preferred maximum debt to income ratios will vary from lender to lender, but you can count on a figure somewhere between 36% and 40% as the norm maximum debt to income ratio.

How to calculate it:

To calculate debt to income ratio, first add up all the payments you make each month to service your debt. Such debt often includes your housing expense (mortgage or rent), credit card payments, car loans, and other debts such as student loans, investment loans, etc. Next, divide your total monthly debt by your gross income per month (before taxes), then multiply that number by 100 to get your debt to income ratio as a percentage.

Example:

Let's say each month your mortgage payment is $1,400, your car payment is $400 and you pay $200 on credit cards. Totaled, your monthly debt commitment is $2,000 per month.

If you make $54,000 a year, your monthly gross income is $54,000 divided by 12 months for a total of $4,500 per month.

Therefore, your debt to income ratio is $2,000 (outstanding monthly debt payments) divided by $4,500 (monthly income), which works out to about .44 (x 100) you get a 44% debt to income ratio.

In this example, a 44% debt to income ratio, by most bank standards, will be considered high; therefore, if this was your situation, you might be declined for a new loan request. In some cases, however, an approval may be granted, but that approval may come at a cost in which you would be asked to pay a higher than market interest rate for your new loan.

So there you have it - a brief insight of what your banker is referring to when he mentions your DTI ratio. It should be noted that by keeping your debt to income ratio low, you can be assured that you can financially handle the debt you have already taken on, and most likely qualify for future credit. Carefully manage that debt and before you know it, you’ll have that new car, home addition or boat you’ve always wanted!

To easily monitor your debt to income ratio, try Mariner360, our free personal management tool that allows you to aggregate all of your accounts so you can see everything in one place.

Be sure to leave a comment below to let us know if you have any further questions about debt to income ratios or if you would like to hear more about this and similar topics.

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1st Mariner Welcomes New Team Member Thanks to PaYS Program

by Janis Smith 24. July 2012

In 2009, 1st Mariner Bank became an active partner with the United States Army in the Partnership for Youth Success (PaYS) Program. The PaYS Program is designed to assist Soldiers in securing their future once their service to our country is complete. The PaYS Soldier agrees to fulfill their Army obligation, and then benefits from a “foot in the door” with a partnership company, like 1st Mariner Bank. It’s a “win-win” for everyone involved, as we benefit from having job candidates with a positive work ethic as demonstrated by their successful Army service. 

1st Mariner Bank recently utilized the PaYS Program in the recruitment of Ciara Brown, a Teller at our Cockeysville branch. Ciara joined the Army Reserve in October 2011 as a Chemical Operations Specialist (Chemical, Biological, Radiological and Nuclear). She completed Basic Combat Training in Fort Jackson, South Carolina, and then attended Chemical School at Fort Leonard Wood, Missouri. She is currently stationed at a Civil Affairs Unit, or Airborne Unit, in Riverdale, Maryland. Ciara says, “There’s a lot to do while in the service, and I’m looking forward to a rewarding career, both in the Army Reserve and at 1st Mariner Bank.”

Welcome aboard Ciara!

To learn more about Partnership for Youth Success please visit https://www.armypays.com/INDEX2.html or http://www.facebook.com/armypays.

Housing Market Appears to be in Sustained Recovery

by Anirban Basu 19. July 2012
Despite Braking Economy, Housing Moves Ahead

After re-accelerating late last year and during the initial months of 2012, the pace of economic growth and job creation has slowed more recently. In June, national employment expanded by just 80,000 jobs according to the Bureau of Labor Statistics. June represented the third consecutive month during which national job creation was well below 100,000 jobs. During the first three months of the year, the nation's average monthly employment gain was 226,000 jobs. During last year's fourth quarter, the nation's output expanded at a 3 percent annualized pace, but during the first half of 2012, the nation's economy expanded at a less than 2 percent pace.

Maryland has not been immune to the slowdown. Unemployment in Maryland has increased for a third consecutive month in May (6.8%) and the state has been losing jobs. Whether Maryland's economy will continue to decelerate in unclear. Also unclear is whether or not recently observed housing market momentum can persist in the face of broader macroeconomic weakness.

A recent Wall Street Journal article simply proclaimed that the "housing market has turned." Nationally, nearly 10 percent more existing homes were sold in May than in the same month one year earlier. Builders began work on 26 percent more single-family homes in May 2012 than a year earlier and the stock of unsold newly built homes is back to 2005 levels. A recent survey of 47 forecasters found that 44 believed that the housing market has reached its bottom.

Maryland has been participating in housing's recent recovery, but there are indications that the pace of recovery has slowed. Home sales statewide increased 10.5 percent in May on a year-over-year basis. But in June, the year-over-year was just 1.7 percent, with 11 Maryland jurisdictions reporting year-over-year sales gains. Many of the observed gains in unit sales, though certainly not all, took place among core metropolitan area jurisdictions. This is likely a reflection of the influence of first-time buyers, who have been setting off cascading sales dynamics. By contrast, in counties with less dense job markets and first-time buyer influence, sales growth has been less consistent.

Price dynamics remain positive in Maryland. In June, average price was up 6.7 percent on an annual basis while median price was up 8.5 percent. Sixteen jurisdictions experienced year-over-year increases in average sales prices and 19 reported increases in median sales prices in June. Certain jurisdictions continue to experience falling home prices, however, including a number of Eastern Shore jurisdictions: Dorchester County (average price declined 55.8%; median price up 0.1%), Kent County (average price slipped 18.8%; median price fell 25.9%), Somerset County (average price dipped 9.4%; median price fell 18.9%), and Worcester County (average price slid 14.4%; median price decreased 17.2%).

Looking Ahead

Despite growing confidence among economists, there are reasons to remain nervous about the housing industry. Consumer confidence is declining again and job growth slowed dramatically during the second quarter relative to the first both nationally and in Maryland. The next several months should be months of progress, however. Pending sales in Maryland were up on a year-over-year basis in both May (+375 units) and June (+282 units). In June 2011, Maryland's supply of housing inventory stood at 7 months. A year later, inventory had declined to 5.1 months - a level consistent with rising home prices and greater urgency among prospective buyers.

 

Anirban Basu is Chairman & CEO of Sage Policy Group, Inc., an economic and policy consulting firm in Baltimore, Maryland. Basu is one of the Mid-Atlantic region's most recognizable economists, in part because of his consulting work on behalf of numerous clients, including prominent developers, bankers, brokerage houses, energy suppliers and law firms. On behalf of government agencies and non-profit organizations, Basu has written several high-profile economic development strategies, including co-authoring Baltimore City's economic growth strategy. His opinions do not necessarily reflect the opinions and beliefs of 1st Mariner Bank.



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