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Shortly after graduating from New York University with a Master’s degree, Melanie Lockert turned to food stamps, as she worked her way out of $81,000 in student loans.

“There were a lot of emotions around carrying that debt. It caused a lot of stress and depression and anxiety for a long time,” she shared with me recently during an interview on my podcast.

The student loan crisis in America has reached epidemic proportions. With households across the country carrying $1.26 trillion in student loans, it is the second largest category of debt following mortgage debt.

For the class of 2016, the average student loan balance is $37,172, up six percent from the previous year, according to a new analysis by student loan expert Mark Kantrowitz published in the Wall Street Journal.

If you’re struggling to make ends meet due to student loans or wondering how you’ll ever pay off the debt in a timely manner, here are some key steps to support you along the way.

Never Pay Late. Ever.

Whoever likes to call student loans “good debt,” has probably never faced a late payment. “Falling behind on payments can cause federal loans to enter default, triggering expensive fees and collections,” says Heather Jarvis, attorney and student loan expert.

If you miss several payments and are in default, federal loan borrowers may also seize your wages, tax refunds and possibly social security benefits. And you can only imagine how all this can damage your credit score. (Keep reading for advice on what to do if you’re already in default.)

To avoid ever paying late, sign up for automatic payments with your lender. Doing so could also earn you a reduced interest rate (usually 0.25%), which could save you hundreds of dollars, maybe more, over the life of your loan.

Extend the Term

Speaking of your loan’s life, extending the term from 10 to 15 or 20 years could provide you with some payment relief since when you extend the term, your monthly payments decrease.

Bear in mind that since your interest rate remains the same this strategy may mean you’ll end up paying more to pay off the loan over time.

One way to avoid paying too much more interest is to take advantage of the smaller monthly payments for only a window of time. As soon as your finances strengthen place more than the monthly minimum towards your balance to help you get out of debt closer to your original term. Be sure to place extra payments directly towards the principal to knock down the debt even faster.

Tap Government Assistance

If you have federal student loans you may qualify for Income-Based Repayment (IBR), a government program that helps qualifying borrowers cap loan payments to a percentage of income, typically 10% of their income. The program will also forgive any remaining student loan debt after 20 or 25 years of making payments.

The Department of Education also has a program called Public Service Loan Forgiveness (PSLF). If you work full-time for a “public service” employer such as not-for-profits, AmeriCorps or PeaceCorps, the military or a government agency, PLSF may forgive your remaining federal loan debt after 10 years of employment.

If You’re Already Behind…You Have Options

If you’re in default, Jay Fleischman, a student loan and bankruptcy attorney, says you may be able to consolidate your loans under the U.S. Department of Education’s Direct Consolidation Loan Program, which is free and does not depend on creditworthiness.  “You could also rehabilitate by making nine agreed-upon monthly payments over a 10-month period of time with the collector assigned to the account. Those payments may be adjusted based on your income, and payments can be as low as $5 per month,” he says.

For private student loan borrowers, “the situation is markedly different because there is no right to consolidate or rehabilitate unless the lender has a specific program to do so,” says Fleischman. Contact your loan servicer and learn about ways you may be able to reduce or eliminate payments until you get back on your feet, he says.

If your lender won’t budge, you may choose to remain in default until a settlement opportunity presents itself or until the statute of limitations for collection expires. As a last resort, you may also consider bankruptcy as a way to wipe out other debts and repay your student loans under court supervision. “Though bankruptcy may not wipe out your student loans except in limited circumstances, many people opt for bankruptcy as a way to get more control over the ways in which your loans get paid,” says Fleischman.

Tap Home Equity…With Caution

Homeowners may be eligible to use a home equity line of credit (HELOC) to pay off their remaining student loan balance. This allows them to pay off the student loan with the existing equity in their home and save money if the HELOC has a lower interest rate than the student loan.

There’s also a new program offered by online lender SoFi called the Student Loan Payoff ReFi that allows some homeowners to pay down student debt using their home’s equity.  SoFi refinances the total amount of your student loans and existing mortgage at a lower rate. Through that process your student loan balance is paid off directly to the loan provider.

To qualify, SoFi says borrowers need healthy credit scores (check your free credit score to verify you qualify), a debt-to-income ratio that’s 45% or less (calculate debt-to-income ratio to see if you fall under this number) and a loan-to-value ratio that’s 80% or less (meaning you can’t be underwater on your mortgage). You can calculate your debt-to-income ratio with Turbo, and

Just keep in mind that when paying off your student loans with home equity – be it through SoFi or another lender – if you default on the consolidated loan the lender has the right to use your home as collateral and foreclose on the property. It’s a serious risk if you don’t have enough in savings or stable income to help you get by during tough times.

Remember to Deduct It

Student loans are no fun, but paying them can yield lower taxes. Each year the IRS lets borrowers deduct up to $2,500 in student loan interest from their taxable income.

Maybe Your Employer Can Help?

A growing number of companies are helping employees squash their student loans as an added perk like a 401(k) and health care.

Gradifi is a Boston-based start-up that’s working with over 200 employers to set up its student loan pay down plan, including PriceWaterhouseCoopers.

It’s a trend that’s likely to grow over the years with more than 50 percent of student loan borrowers saying they would rather receive student loan benefits than heath care from their employer.

Start a Side Hustle

While it’s important to cut back on spending to make room for paying down debt, that move alone isn’t always enough. “Pinching pennies and cutting back is really useful as an initial strategy, but at some point, there’s only so much you can cut back,” says Lockert, whose now chronicled her debt payoff strategies in the book Dear Debt: A Story About Breaking Up With Debt.
Through a series of side hustles over the years, including housecleaning, event assisting and pet sitting, earning $10 to $50 per hour, Lockert managed to not only afford her living expenses, but also erase five figures worth of student loan debt.

Depending on your interests, you can find relatively easy gigs at sites like TaskRabbit, Tutor.com, GigWalk and Care.com.

Have a question for Farnoosh? You can submit your questions via Twitter @Farnoosh, Facebook or email at far[email protected] (please note “Mint Blog” in the subject line).

Farnoosh Torabi is America’s leading personal finance authority hooked on helping Americans live their richest, happiest lives. From her early days reporting for Money Magazine to now hosting a primetime series on CNBC and writing monthly for O, The Oprah Magazine, she’s become our favorite go-to money expert and friend.

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Apache is functioning normally

Save more, spend smarter, and make your money go further


Last Friday is affectionately known as Black Friday, and and today is Cyber Monday.  These colorful monikers are used to describe two of the heaviest shopping days of the year, both of which kick off the holiday shopping season.  This isn’t a secret and the retailers see you coming.

The National Retail Association will release the official results of Black Friday shopping on November 28th, but we already know that the numbers are going to be massive, because they always are.  In fact, the billions that will be spent from Black Friday until the after Christmas sales will likely outpace what we’ve spent at retailers in the preceding 47 weeks.

So, why am I telling you all of this?  I’m telling you because many of you have, or will open, new retail store credit cards or general use credit cards during the holiday shopping season because their offers are very enticing this year.  Retail card issuers will offer between 10 and 20 percent off daily purchases, and some of the general-use card issuers are offering $100-$200 cash back bonuses if you charge more than $500 over the next three months.

Because you’re likely to spend more than normal, you’re more likely to consider at least one of these offers.  While many of you will permanently add the card to your wallet’s inventory, some of you will use the initial discount offer and then close the credit card after the holiday season.  For those of you who’ve followed my Mint blog, you know that closing a credit card can cause problems for your credit scores.  So, what gives?  Is it a good idea or not to close a credit card?

The Good News

The good news about closing credit cards is that you eliminate the potential for fraudulent use, which shouldn’t be much of a concern to you since the Fair Credit Billing Act caps your liability to only $50.  There’s also no way you can use that card to get yourself into excessive (or even modest) credit card debt, and that’s not a bad deal either.  Although, I’d argue that getting into credit card debt is a choice, not a requirement.

Generally, it’s ok to leave your credit cards open and use them all from time to time just to prevent the issuer from closing them because of inactivity.  Having unused credit limits is actually very good for your credit scores, even if you never use the card.  Of course, you only have unused credit limit if your cards are open.

The Bad News, and More Good News

The bad news when closing a card is made up of one big deal and one myth.  When you close a credit card you lose to access to the credit line, which can lower your credit scores.  The amount it can lower your scores is going to depend on how much of a line you just lost AND how much credit card debt you carry on other credit cards.  If you have no debt, then the closure might be meaningless.  If you carry a lot of debt, then the closure will likely be significant.

If you’ve ever explored the downside to closing a credit card on the Internet, then you’ve inevitably seen someone talk about how you should close newer cards and leave the older ones open.  This is the myth and it suggests that closing older cards can make your credit file look younger, which lowers your credit scores.  Credit scoring systems take the average age of your accounts when calculating your scores.

The problem, and what makes this one a myth, is that the average age of your credit accounts considers both open and closed accounts, including credit cards of all types.  According to Craig Watts, a FICO spokesperson, “When assessing length of credit history, the FICO score considers the origination date on all accounts on the credit report, open and closed.”

This is great news for consumers who want to close down unused or unwanted credit card accounts.  Now they can choose which ones to close based on how expensive the rate is or how high the annual fee, and not based on whether it’ll hurt the average age of your credit report.

I’d strongly suggest when you’re choosing which cards to close that you consider closing retail store cards instead of general-use cards like Visas, MasterCards and Discovers.  The reason is the limits on retail cards are generally very low, at least when they’re initially issued, compared to the limits on your general use cards.  This will limit the damage you’re going to cause to your credit scores because you’re probably not closing credit cards with thousands of dollars of credit limits.

Happy shopping!

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. The opinions expressed in his articles are his and not of Mint.com or Intuit. Follow John on Twitter.

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Apache is functioning normally

Save more, spend smarter, and make your money go further

As we ring in the New Year, financial resolutions top our to-do lists, from saving more to finding a new, better-paying job and getting out of debt once and for all.

As you map out your next money move, take heed of some of these top market and economic predictions for added guidance.

Higher Borrowing Costs

Looking to open a new credit card or apply for a mortgage this year? It may be wise to act sooner than later.

With the broader economy improving since the financial crisis (e.g. the national unemployment rate is hovering at 5%, down from nearly 10% in 2009), economists, including Janet Yellen, chairwoman of the Federal Reserve, believe it’s time for a tightening of monetary policy (translation: boost interest rates to curb inflation.)

Fortune Magazine’s “Crystal Ball,” says we can expect a three-quarter-point increase by next Thanksgiving to 1.25%.

When the Fed raises the overnight bank-lending rate (aka the Fed Funds rate) that typically has a domino effect on interest rates for other mainly short-term financial products like credit cards and car loans.

What this means for us? If you’re in the market to borrow money, I recommend reviewing your credit ahead of any applications to see what improvements (if any) are necessary. The higher your credit score, the better chances you have of achieving the lowest interest rates on the market.

If you’re seeking to refinance or buy a home this year, also aim to lock in a rate as soon as possible. While an increase in the Fed Funds rate isn’t necessarily a precursor to higher mortgage rates, we’re already seeing an uptick on 30-year home loans to above 4%. And Fannie Mae’s National Housing Survey shows that more than 50% of consumers think mortgage rates will continue to elevate over the next year.

Finally, for those of us with adjustable rate loans (e.g. some student loans and mortgages) we may want to pay off our debt more aggressively or refinance to a fixed-rate loan to put a lid on rising monthly payments down the road.

Less Sticker Shock in Housing

With home loan rates expected to track north, home values may see some cooling in 2017. That’s because when mortgage rates jump, demand for housing tends to slowdown, placing pressure on sale prices.

Not to mention, after riding a hot streak in recent years with prices across the country hitting near pre-recession levels, real estate experts at Zillow.com now predict a “normalizing” market with more moderate price growth of 3.6% across the country in 2017, compared to 4.8% last year.

Prepare for more affordability in areas that have experienced the steepest gains. In Los Angeles, for example, home prices have trended considerably higher in recent times (up 7.3% over the past year, alone). In 2017, though, the city can expect a tempering of home values to a growth of just 1.7%, according to real estate website Zillow.com.

As for rentals, after double-digit surges, rents in many large metro areas will also see slower growth in 2017, per Zillow. Rents across the country are expected to rise approximately 1.7 percent this year to about $1,429 per month, down from a 6% appreciation reported last year.

Partly to blame for the cool down in rent is a glut in inventory. Builders were very busy over the last few years, but the demand for new units in some hot neighborhoods like Brooklyn, N.Y. is failing short of supply.

As a result, some landlords at higher end luxury apartment buildings in that borough have been striking sweet deals with renters since last summer, The New York Times reports.  For example, at 7 DeKalb, a new high rise in Brooklyn, “the landlord is offering two months of free rent with a 14-month lease, and use of the building’s fitness center and other amenities for a year without charge.”

That’s a good reminder to prospective renters everywhere that it can never hurt to negotiate, especially this year!

Have a question for Farnoosh? You can submit your questions via Twitter @Farnoosh, Facebook or email at Far[email protected] (please note “Mint Blog” in the subject line).

Farnoosh Torabi is America’s leading personal finance authority hooked on helping Americans live their richest, happiest lives. From her early days reporting for Money Magazine to now hosting a primetime series on CNBC and writing monthly for O, The Oprah Magazine, she’s become our favorite go-to money expert and friend.

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Apache is functioning normally

Save more, spend smarter, and make your money go further

This Independence Day, as with each 4th of July, I’m reminded of the great leap of faith my parents took more than 37 years ago when they bought one-way tickets to the United States. Their move from their embattled Iran granted my brother and me a life of privilege and greater freedoms.

Their journey also encourages me to be a do-gooder and, as nerdy as it sounds, manage my money wisely. Because you can’t exactly say to your immigrant parents, “Hey, thanks for risking everything and moving here to give us a better life, but I have $80,000 in credit card debt and need to move back home.”

I want to be financially free, if for no other reason than to make them proud. That means living a debt-free life and supporting my family’s needs and wants both today and in the future. It means having my financial bases covered to avoid stressing over money. For me, personally, it also means have a little savings cushion for the day my parents might need my help for a change.

The term “financial freedom” signifies different things to different people. I was curious to learn more, so I took to the world of social media to crowd source the many definitions.

On Twitter, I ran a small, unscientific survey and discovered that one in three of us define financial freedom as never having to worry about money. I was surprised to learn that only 3% think making more and having more money is the exclusive path to financial freedom. A majority of us think that it’s a combination of being debt-free, having more money and never having to worry about dollars and cents.

On my Facebook page, feedback came from all over the country and overseas. Financial freedom is an aspiration for many of us, and we define it with terms like, “having choices,” “peace of mind” and “living in abundance.”

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What’s your definition of financial freedom? Share it with us in the comments section below.

Have a question for Farnoosh? You can submit your questions via Twitter @Farnoosh, Facebook or email at far[email protected] (please note “Mint Blog” in the subject line).

Farnoosh Torabi is America’s leading personal finance authority hooked on helping Americans live their richest, happiest lives. From her early days reporting for Money Magazine to now hosting a primetime series on CNBC and writing monthly for O, The Oprah Magazine, she’s become our favorite go-to money expert and friend.

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Apache is functioning normally

Save more, spend smarter, and make your money go further

Aaron Hahn vividly remembers the moment he decided to crush his debt.

It happened in March, while visiting his retired aunt and uncle in Arizona.

Their home, with a lush, sprawling golf course as its backdrop, symbolized to him the power of hard work and consistent savings. Not to mention, this was their vacation home, a place where his “snowbird” aunt and uncle enjoyed visiting during the winter months.

“It was my ‘aha’ moment,” says Hahn, who, at the time, had about $42,000 in debt spread across student loans, a car loan and credit cards.  “I was like, ‘O.M.G. I want this life.’ I want to do what they’re doing. I want to be financially independent.”

Hahn had also just celebrated his 34th birthday, which served as another wake-up call. “It was a confluence of events…I realized that I just wasn’t taking care of money like I should be, like a grown-ass man,” says Hahn. “I feel like there’s an awakening when you’re in your 30’s.”

His first plan of attack: Obliterate his $11,000 in credit card debt. For Hahn, credit was just a tool to for buying stuff when you didn’t have the cash. “The credit card debt was just something I was misusing,” he admits. “It became another part of my spending arsenal. I used credit for more spending power.”

Since March Hahn, who works in the Navy, has embarked on a diligent plan to reach debt zero across his four credit cards. Using a free personal loan calculator, he’s given himself 12 months to eliminate all balances and has, for the first time ever, begun budgeting.  He’s using Mint to stay on track.

Will Hahn cross the finish line in time? I thought it would be interesting (and fun?) to check in from time to time to report on his progress and setbacks. He says he likes having me as an accountability partner.

Here’s how Hahn’s staying focused and handling some setbacks in the first few months.

“Budgeting is Like Yoga”

Hahn’s Mint budget is his first true budget. “It is a behavioral modification. It’s like doing yoga for the first time. There’s pain and discomfort,” he laughs.

To make room for the roughly $900 a month debt payments, he’s had to make some big trade-offs. The greatest challenge has been cutting back on restaurant meals and outings with his girlfriend. “I though you needed to go out and have dates in order for there to be a connection,” Hahn says. “Instead, we’re spending more time at home and realizing that it’s ok. I have her support in that.”

His girlfriend is also helpful in planning and cooking their meals at home. “She makes enough so I have lunch the next day.” This alone, saves him $70 per week, Hahn estimates.

The “Wall of Shame”

While Hahn has a total of $42,000 in debt, he’s zeroing in on the credit card balances first using the snowball method and attacking the card with the greatest interest rate first. All the while, he’s stopped using plastic and sticking to a cash-only diet.

For motivation, he uses visual reminders. “I’ve printed a list of all the individual balances on my fridge. It’s my ‘wall of shame’ and I’m looking forward to crossing them off,” says Hahn.

Simultaneously Saving

It’s been a slow process, but Hahn is also working towards a three to six-month emergency reserve. “That was what my credit cards had been.” So far he’s managed to tuck away $1,000. “I just love the idea that, for the first time in my adult life, I saved $1,000 and didn’t spend it. It’s such a good feeling.” Once the debt’s paid off, he plans to make savings a higher priority and add more to the account.

An “Actual” Emergency

It’s a good thing that he started saving because in May, Hahn emailed me to say that his debt payoff plan had suffered a minor setback. But it was for an important cause: healing his cat.

He wrote: “One of our emergency funds just came in handy. The day after I (quite literally) cut up my credit cards, our cat, Yasmin, became very sick over the weekend, requiring a visit to an emergency veterinary clinic. Between buying a new pet carrier and the vet expenses, this was $550 that neither of us had planned. 

Fortunately, Andrea (my partner) has an emergency stash of her own, and between the two of us, we were able to handle this curveball with relative ease. Yasmin is okay (we have a follow-up appointment in two weeks), and we’ve used this event to reinforce just how crucial it is for both of us to set aside significant, liquid savings.

As for my debt repayment plan, this will weaken my attack for the month of May, as I want to stash an additional $500 into an emergency fund for when we run into another inevitable hurdle.”

Following that email, Hahn wrote about another surprise: A bigger car maintenance bill than anticipated.

All said, between the vet and car maintenance costs, he had to fork over $800 in unplanned expenses.

“This is definitely going to slow my debt repayment down by a month. Not very thrilled about this. Feel a bit defeated, honestly,” Hahn wrote.

Still, none of that $800 got charged to a credit card. So, in my book that’s #progress.

How will Hahn fare over the summer months? Will he find a way to get back on track?

Stay tuned to the Mint Blog for more updates on his debt payoff plan.

Have a question for Farnoosh? You can submit your questions via Twitter @Farnoosh, Facebook or email at far[email protected] (please note “Mint Blog” in the subject line).

Farnoosh Torabi is America’s leading personal finance authority hooked on helping Americans live their richest, happiest lives. From her early days reporting for Money Magazine to now hosting a primetime series on CNBC and writing monthly for O, The Oprah Magazine, she’s become our favorite go-to money expert and friend.

 

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Apache is functioning normally

Save more, spend smarter, and make your money go further

The summer’s been a trying season for our friend Aaron who’s determined to erase $11,000 worth of debt over 12 months.

He is now nearly six months into his plan and says the path has been harder than he could have ever imagined. I wrote earlier that he’s also trying to simultaneously build up his cash reserves, which makes it even more difficult to avoid using his credit cards when unforeseen expenses pop up. Between his cat’s medical emergency and a rise in car maintenance costs, Aaron estimates that he is about $700 off his original debt pay off pace. He’s hoping to play some catch up in the coming months.

Here’s an overview of how Aaron’s trying to plow ahead.

A Failsafe Plan

Aaron’s cut up all of his credit cards, except for one…which he’s deactivated and given to his girlfriend to avoid using it in a pinch. “It’s our double-failsafe way of having it if we need it, but we definitely do not want to use it,” he says.

Knowing that the holidays are an easy time to rack up credit card debt, Aaron’s also begun to save in a separate fund for those anticipated costs such as gifts and travel. The goal is to not use credit at all this year. “We have about $450 in that holiday fund so far. We have a goal of $800,” he says.

Moving to San Diego

Some more surprising (and costly) news for Aaron, who works for the Navy: He will be relocated to San Diego starting next year. This will mean a rent increase from where he currently lives. It’s all adding pressure to his current plan to save more.

He has stopped his Thrift Savings Plan contributions temporarily while devoting more to debt payments and building his emergency fund.

“I give myself a C+ for my first few months. It’s tough to stay disciplined, but staying below my Mint budget threshold has made eyeballing my finances a lot easier,” he says.

Stay tuned to the Mint Blog for more updates on his debt payoff plan.

Have a question for Farnoosh? You can submit your questions via Twitter @Farnoosh, Facebook or email at far[email protected] (please note “Mint Blog” in the subject line).

Farnoosh Torabi is America’s leading personal finance authority hooked on helping Americans live their richest, happiest lives. From her early days reporting for Money Magazine to now hosting a primetime series on CNBC and writing monthly for O, The Oprah Magazine, she’s become our favorite go-to money expert and friend.

Save more, spend smarter, and make your money go further

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Debt-to-Income Ratio Overview

Your debt-to-income ratio, or DTI, is your total monthly debt payments divided by your total monthly gross income. DTI ratio is one of the criteria lenders use to determine whether you can realistically pay back a loan. As a general rule of thumb, you want to have a DTI ratio between 35% and 50%.

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If you’ve been shopping around for a mortgage, then you’ve probably run into the term “debt-to-income ratio”. This can be a confusing term for someone with limited knowledge when it comes to finance. But, when you apply for a major loan, your debt-to-income ratio can have a significant impact on whether or not a lender approves your application. 

So knowing what a debt-to-income ratio is, and how to calculate debt-to-income ratio, is essential if you plan on taking out a mortgage or any other major personal loans in the near future. In this article, we’ll cover the following questions and topics: 

  1. What is a Debt-to-Income Ratio? 
  2. How to Calculate Your Debt-to-Income Ratio 
  3. What is an Ideal Debt-to-Income Ratio? 
  4. What is the 43% Rule? 
  5. Does Your DTI Ratio Impact Your Credit? 
  6. How to Improve Your DTI Ratio 

What is a Debt-to-Income Ratio? 

A debt-to-income ratio, or DTI ratio, is a metric that measures an individual’s gross monthly income against their total monthly debt payments. What your DTI ratio ultimately represents is the percentage of your monthly income that is used to pay off your outstanding debts. 

This ratio is commonly used by lenders to evaluate potential borrowers, determine whether or not they’re able to take on additional debt, and assess the likelihood that they will be able to repay a loan. While a low DTI ratio indicates that you have been able to manage a healthy balance between debt and income, a high DTI ratio indicates the opposite—namely, that you owe a high amount of debt relative to your income, likely aren’t able to save much money each month, and are essentially living paycheck to paycheck. 

Now that you have a foundational understanding of DTI’s meaning and application, let’s dive a bit deeper.

What Factors Make Up Your DTI Ratio? 

The sum of your monthly debt payments includes credit card payments, your mortgage, child support, alimony, and any other loans you may have taken out. However, some recurring monthly payments aren’t included in your DTI ratio. According to moneyfit.org, you shouldn’t factor in non-debt payments such as:

  • Insurance premiums
  • Phone bill
  • Childcare expenses 
  • Home utilities, such as your electric, heating, water, sewer, and trash bills 
  • Gym membership 
  • Music, cable, and streaming subscriptions 
  • Internet bill 
  • Landscaping costs 
  • Storage unit rent
  • Income tax 

Your gross monthly income is just your monthly pay before things like taxes and other deductions are taken out. Some common types of income that are factored into your DTI ratio, are as follows: 

  • Gross income, whether hourly or salaried 
  • Tips and bonuses
  • Any income earned from a side gig
  • Pension income
  • Rental property income 
  • Self-employment income 
  • Social Security benefits
  • Alimony received
  • Child support received

How to Calculate Your Debt-to-Income Ratio 

Learning how to figure out your debt-to-income ratio is a valuable skill that can help you with more than just your mortgage applications. We’ve provided step-by-step instructions for how to calculate your DTI below.

You can calculate your debt-to-income ratio by dividing the sum of your monthly debt payments by your gross monthly income. Once you figure out your total monthly debts payments and add up your gross monthly income, you’ll be ready to divide those numbers and calculate your DTI ratio. 

Dividing your monthly debt payments by your gross monthly income will give you a decimal number. In order to view your DTI as a percentage, you’ll have to multiply the decimal outcome by 100. 

Example Calculation 

To get a better understanding of how to calculate your DTI ratio, let’s take a look at a fictional example.

Here’s the situation: Mike has a gross monthly income of $5,000. He pays $1,000 on his mortgage, $400 for his car, $400 in child support, and $200 for other debts. 

So, following the equation above to calculate Mike’s DTI ratio, we end up with: 

$1,000 + $400 + $400 + $200 = $2,000 

Therefore, Mike’s DTI ratio = $2,000 / $5,000 = 0.4 x 100 = 40% 

What is an Ideal Debt-to-Income Ratio?

In general the lower your debt-to-income ratio is, the more likely it is that you’ll be approved for a loan you’re applying for. According to incharge.org, DTI ratios that fall between zero to 35% are considered healthy according to the standards of most major lenders, since they indicate that your debt is at a manageable level relative to your monthly income. 

So what is a bad DTI ratio? Having a DTI ratio of 50% and above is considered an unhealthy level of debt in most cases, and can severely limit the kinds of loans you qualify for. Such a high ratio indicates that you likely don’t have much money to save or spend each month after making your current debt payments.

What is the 43% Rule?

The 43% rule is a rule of thumb used by banks and lenders to determine who is able to be approved for a Qualified Mortgage. Generally speaking, 43% is the highest DTI ratio you can have in order to be approved for a Qualified Mortgage by a lender. 

If you’re unfamiliar with what a Qualified Mortgage is, it’s a category of loans that meet a particular set of standards and certain safety features that protect both the borrower and the lender. In order for a lender to offer you a Qualified Mortgage, they must adhere to certain requirements and make a good faith effort to evaluate your finances and determine whether you’ll be able to repay the loan or not. 

The upside of a Qualified Mortgage is that it has a number of parameters in place that are supposed to help prevent you from taking out a loan you can’t afford. Some of the requirements for a Qualified Mortgage include:

  • The restriction of risky loan features, such as interest-only periods and balloon payments 
  • A limit on your debt-to-income ratio, the maximum typically being 43%
  • Caps—dependent on the size of your loan—on the amount of upfront points and fees a lender is able to charge 
  • Legal protections for lenders, since it’s assumed that they did their due diligence to ensure you had the ability to pay back your loan
  • Maximum loan term is required to be no longer than 30 years  

All of this isn’t to say that you can’t take out a mortgage at all if your DTI ratio exceeds 43%. You may still qualify for other mortgages with a high DTI ratio, but you generally won’t be able to get approved for a Qualified Mortgage. 

Does Your DTI Ratio Impact Your Credit?

While your DTI ratio has no direct impact on your credit score and won’t show up on your credit report, it can affect your ability to secure loans from banks and other lenders. A low DTI ratio increases the likelihood that you will be approved for the loans you apply for. That’s because lenders take a low DTI ratio as a sign that you are competent when it comes to money management and they can rely on you to pay back any debt you accrue according to the agreed-upon terms. Lenders also take a loan applicant’s DTI ratio into consideration because they want to ensure that borrowers aren’t taking out more debt than they can realistically pay back. 

Although a lower DTI ratio typically makes it easier to get approved for a loan, keep in mind that it’s only one out of many factors that lenders take into consideration. When evaluating a mortgage loan application, lenders will also take a look at a potential borrower’s gross monthly income, the amount they can afford on a down payment, their credit history, and their credit score. 

How to Improve Your DTI Ratio 

There are two variables that go into calculating your DTI ratio—your total monthly debt payments and your gross monthly income. Therefore, to improve your DTI ratio you’ll need to either reduce your total monthly debt payments or increase your gross monthly income. 

Reduce Your Monthly Debt Payments 

Completely paying off debts is a great way to lower your monthly debts payments, but of course this is much easier said than done. Your first step should be to take a look at any loans you’ve already taken out and your current credit card debt and come up with a comprehensive repayment plan. For example, check out our money tips for recent college grads to get some advice on how to formulate a repayment plan for your student loans.

To avoid going further into debt, you should also make an effort to work on your personal finance skills. Try creating a monthly budget for yourself that can help you prioritize essentials, track your spending, and save money, made easy when you use the Mint app.

If you’ve already done some research on how to lower your monthly debt payments, you may be asking yourself, “Is debt consolidation a good idea?” Debt consolidation is when you combine all of your various debts together into one monthly payment with a fixed interest rate, and it may be a good idea depending on your circumstances. 

If you don’t think you’ll be able to make a payment on one or several debts, then you can potentially avoid a late payment by consolidating that debt. However, you must have good credit to get approved for a debt consolidation loan and you should be certain that your financial situation will improve in the near future. If you don’t think you’ll be able to pay back your debts, even with debt consolidation, then you’d likely be better off trying to settle the debts directly with your creditors.

Increase Your Gross Monthly Income

Just like reducing your monthly debt payments, increasing your gross monthly income is a lot easier said than done. After all, it’s not every day that you’re given a raise or offered a job with a high-paying salary. Nevertheless, there are still ways to potentially increase your gross monthly income. Research passive income ideas or check out these examples of things you can do to make a little extra money:

  • Take up a side hustle, such as driving for a ride share company, taking on freelance writing projects, babysitting, etc. 
  • Rent out an extra room in your home (if you have more than one property, consider turning one of them into a vacation rental) 
  • Get a relevant certification or license that would either increase the salary of your current position or help you find a new, higher-paying job 
  • If possible, try to pick up more shifts or get extra hours at work

If you’re in the market for a sizable loan, such as a mortgage loan, you’ll have an easier time securing financing with a lower debt-to-income ratio. If your DTI ratio is higher than 43%, then you might consider waiting to purchase a home until you can lower that number and qualify for a better loan. You should generally try to keep your DTI ratio as low as possible even when you aren’t shopping around for loans. This means minimizing your monthly debt payments and maximizing your gross monthly income—two things that can be hard to achieve, but not impossible. Having a well-thought-out personal finance strategy will make it easier to achieve these goals, keep your DTI ratio consistently low, improve your overall financial health, and provide both you and potential lenders with a sense of financial security. 

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Save more, spend smarter, and make your money go further

It’s often difficult for us to clearly picture where we’ll find ourselves in five to ten years. Opportunities and experiences that we never even dreamed of can pop up a year from now – or even next week – and completely change the course we’re currently on.

With that being said, it can seem downright silly to start planning for something as far off as retirement. For today’s 20- and 30-somethings, that can be multiple decades away. Fully retiring is so far in the future for most of us that it might as well be as far away as the stars in the sky.

When it comes to retirement planning, you have to be strategic.

But if you’re bringing in an income, the reality is that it’s never too early to start planning and saving for retirement. So how do you do that?

You don’t need to be able to fully envision every detail of what your retirement days will look like to start laying the groundwork to build your nest egg. Here are some actionable tips you can put into place right now – even if retirement seems light years away.

Understand the Power of Compound Interest

Compound interest can turn a single penny into 10 million dollars (don’t believe it? Check out this post to see for yourself). Of course, it’s unlikely that any money you invest will provide a 100% return every single day, but it doesn’t need to.

Need more convincing? Here’s another example that talks about two people: person A maxes out their 401(k) for the first 10 years of their career and never contributes another cent, and person B doesn’t contribute anything for the first 10 years of their career and then maxes out for the next 33 years until they retire. Who do you think will come out ahead?

You guessed it: Person A wins by a couple hundred thousand despite contributing $400,000 less over their lifetime.

Explore Your Options

Knowing you need to start saving (even if it’s just a little bit) to take advantage of the combined power of time and compound interest isn’t enough to get started. You need to know where to actually put that money.

Make sure you’re enrolled in a retirement plan from your company if it’s offered, and contribute enough to secure any employer match that may be available. Next, open a Roth IRA and make regular contributions. It’s important that you start developing good savings habits now, so you can maintain them as your income grows.

Avoid Lifestyle Inflation

That brings us to another critical step you need to take in order to start planning for your retirement. If you can only save a little now because of a limited income, that’s okay. But as your income grows, your savings should increase along with it – not your spending.

You need to guard against lifestyle inflation if you want to build a significant nest egg that will see you through all your years after you quit actively earning an income.

You want to add eggs to this nest – not take them away.

Delve into Details

It might be obvious at this point, but planning for retirement starts with developing good habits. Once you have these habits in place, it’s time to start considering the details. While nailing down a precise figure for how much you’ll need in order to retire is difficult, you can start refining your estimations.

Consider what your future goals are. What does your ideal retirement to look like? What level of lifestyle would make you happy? When do you want to stop relying on work for your income and switch to living off your investments?

Your answers to these questions may change, so revisit them on a regular basis. They’ll help inform you about what that magical retirement number looks like for your unique situation.

Remember, it’s never too early to start planning for retirement. When you plan, you’re prepared – and when you know what you need to do, you’re halfway there to making your retirement dream into a reality.

Source: mint.intuit.com