What Are Debt-To-Income Ratios? and What Do They Have To Do With My New Car?

In Don't Buy That Car! Or Anything Else! We introduced this inevitable situation so many of us get in to. We expanded on the idea in Fight That Desire To Spend Money!

We ended the last post with our loan officer saying, "If only you didn't have this car payment, you would certainly qualify for a home loan to buy that house." The reason why she said this was because of your "debt-to-income" ratio.

But, what are debt-to-income ratios?

Today, our goal is to define this in a simple and direct manner.

So, simply put, a debt-to-income ratio is the percentage of your gross monthly income (before taxes) that you spend on debt. This will include your monthly housing costs - including principal, interest, taxes, insurance, and homeowner's association fees, if any. It will also include your monthly consumer debt, including credit cards, student loans, installment debt, and....CAR PAYMENTS!

This whole series has been based upon the purchase of a new car right before you buy a home. Please understand that this "car" doesn't have to be a car. It can be any major purchase.

Next, we are going to actually look at how the purchase of the new car affects the price of the home you can purchase.