Debt To Income Ratio

Okay, another ratio you NEED to know about: Debt To Income.

What does it mean? I promise it's super easy.

You add up all the debt you have in terms of monthly obligations. Let's say you have a minimum payment of $130 on your credit card. Your car loan costs you $140 a month. And your student loan is $185 a month. That's a total of $455 a month in what's known as "debt servicing."

Now, let's say you have a monthly income of $3,200. So divide $455 by $3,200 and voila! 14.2%

When figuring out your monthly debt expenses (debt service) you do NOT include rent, utilities, cable, internet, cell phone, or any other kinds of costs.

HOWEVER: if you have a mortgage you include the monthly payment, plus interest, plus homeowners insurance, plus property taxes.... and all of those costs are usually lumped into one payment or sum anyway.

When you live in Manhattan and are about to purchase a coop to live in, most coop boards (which are a HUGE pain in the neck in some buildings) will be ok with a debt to income ratio of no more than 33%

The same is true for renters. If you are going to rent an apartment on your own.. you should know what your debt to income ratio is.

Same holds true if you plan to purchase a car and use financing to pay for it. If you're already at 33%, you may run into trouble getting financing for a car that costs a lot of money.

More to come on car and home buying in the future.