Accounting Debt

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```Accounting Debt –

Of late, debt issues have become quite common. During the economic crisis, many people had to suffer due to the negative impact of debt on their finances and credit file. So, it is very important to know how much debt we owe to other people. When we speak of accounting debt, we actually speak about the debt ratio.

What is debt-to-income ratio or debt ratio?

The debt-to-income ratio is popularly known as DTI ratio. It helps in comparing your monthly debt expenses to your monthly gross income. Thus, if you want to calculate what your debt to income ratio is, you need to sum up all your monthly debt expenses. While you do so, you will have to include payments like payday loans, student loans, credit card bills, investment loans, mortgage, car payments, other housing expenses, if any, property taxes, homeowners’ insurance payments, homeowner association fees, etc.

Once you have added up all the monthly debt payments, you will have to divide that amount with your gross income that you make every month. Gross income is the income that you make before taxes are deducted. After division, the figure that you get needs to be multiplied by 100 so that you can get your DTI as a percentage.

Let’s take an example...

Let us consider that your current liabilities are \$34,000. Your non-current liabilities are \$200,000. The total assets that you have are \$505,100. Now calculating the debt to income ratio:
Total liabilities = sum of current and non-current liabilities. (\$34,000+\$200,000) =234000
Debt ratio = \$234000 / \$505,100 = 0.463 or 46.3%

Two major kinds of debt to income ratio

While accounting for debt, one should remember that there are two major kinds of debt to income ratio. The first DTI is known as front end ratio and the second one is known as back end ratio.

The front end ratio actually signifies the percentage of income that you use toward housing costs, hazard insurance premium, property taxes, and homeowners' association dues etc.

The back end ratio, on the other hand, signifies the percentage of income that you use for paying all your recurring debt payments.

The debt to income ratio (DTI) is expressed as a pair with the help of an expression like a/b (for example, 28/36).

Limits of debt to income ratio in case of conforming loans

For conforming loans, there are limits to the debt to income ratio. In case of a conventional loan, the limit is at 28/36. However, the FHA limits are presently 31/43. If you opt for the Energy Efficient Mortgage program of FHA, then the limit is at 33/45. For VA loans, the limit of DTI ratio is 41/41 or simply 41. But USDA loans have a DTI ratio limit of 29/41.

Importance of debt-to-income ratio

Well, knowing your debt to income ratio and keeping it within manageable levels will help you keep your financial situation safe and secure. Once you find that your debt to income ratio is going out of control, you should start taking steps to get it in control.

Now that you know how to calculate your debt to income ratio, hope you will be able to keep your financial situation in control.

At Livedebt.org we look forward best to gather information about personal or business debt that matters to all readers. The power we have is based on the fact that why shall you have debt?```