Okay, first I want to make sure I understand what it is. It is the total monthly payments for debt service / total gross income. Correct?
Now, I have education loans, but I am currently enrolled in school so I have no payments at present. But today I was denied for a loan because my “debt to income” ratio was too high and they used my education loans in the equation. How would they calculate that monthly payment when I’m not making one? After school, I have the option to finance those for 5, 10, or even 20 years. And I’ll be making a higher income, so that payment will be a lesser part of my income, but that’s a different rant.
Is this a common practice? How do they calculate that pretend payment?
Whether you choose 5, 10 or 20 year payments really doesn’t matter too much. You’ll pay not much different, because the first few payments are mostly interest.
-interest rates are at a ludicrous all-time low. You know they gotta go up as soon as the economy levels off or starts recovering. So don’t expect them to be considering the “what would my payment be today” number. They proabbly look at the longer term interet projections.
You are still in school so probably have not got a full-time job, and the economy is in the toilet so you’ll be looking for a real job soon at a bad time. The longer you have to look, the more other people will be graduating and competing with you. Meanwhile your income probably is not too high. And, when you do graduate, you’ll be saddled with a decent load of debt already. Which of these facts gives me confidence to lend to you?
Finally, the answer is in the question -*** DEBT*** to earnings ratio. Not payments, debt. they aren’t calculating how much you pay; their charts just say “how much do you owe, how much do you earn”? If that ratio is the wrong side of their magic number, no loan.
It’s the same sort of calculation intelligent bankers use(d) for mortgages - your house should not be more than X times your annual income; such that your total payments would work out to be a third to a half your disposable income.
Maybe you have the number backward? If you make $50,000 a year, you should be able to support $150K of debt. If you go to school full time and make $50K a year, then “wow!”.
Of course, that magic number is for a mortgage? If you have to pay rent not mortgage AND want to borrow money, it would be different. Or if you had student loans or other debt PLUS a rent payment?
150k of total debt? Mortgage, car loans, credit cards, everything?
Still doesn’t make sense. I’ll put the real numbers out there. I bring in about $35k /yr and even with this car loan, I would have total debts (student loans, the car, and all) of $50k. That doesn’t seem too far out of line, especially when I’m not paying on the student loans..
ETA, but the loan officer says I have a debt to income ratio of 42% without the loan! It would be 53% with the loan. They won’t go above 35%, so that means they won’t lend me bus fare..
For the millions following this thread, I talked to the loan officer. They assume 5% of the total principle balance of a deferred education loan. I told her that was ridiculous that the payment would be nowhere near that.
She had me get a letter from my lender that stated the approximate payments when I graduate, she accepted those, and approved the auto loan.
Since this thread seems answered already, would it be ok for a slight hijack?
What is the maximum debt to income ratio a bank would be comfortable loaning to?
Real life numbers…i make $40K a year and according to the calculator upthread i currently have a 20% ratio. I want to apply for a loan which will put me at 45%.