Bring Your Debt Ratios Into Balance

Net worth is comprised of liquid assets, investment assets, real estate and related property, and personal property. Liquid assets are checking or savings accounts, money market accounts, and other assets that can be easily turned into cash; while investment assets like stocks, bonds, or mutual funds appreciate in value over time. A large portion of most people's wealth is tied to their homes, but personal property does not contribute to wealth.

When reviewing a mortgage application, lenders scrutinize prospective borrowers' total debt-to-income ratios, calculated by dividing monthly minimum debt payments by monthly gross income, as well as their monthly housing expenses to see how much of their earnings is tied to assets that do not accumulate wealth. Most lenders prefer housing expenses under 28 percent of a borrower's monthly gross income and total debt-to-income ratios no higher than 36 percent, although there is increasing flexibility among today's mortgage providers.

Financial counselors say borrowers with debt-to-income ratios of 20 percent or less are likely to be approved by lenders, while those with ratios of 21 percent to 39 percent need to re-evaluate their spending and work to slash high-interest credit card balances.

Those whose debt-to-income ratios are 40 percent to 50 percent, meanwhile, are in serious financial trouble.

"Figure Your Own Debt-to-Income Ratio and See Where You Really Stand," Knoxville News-Sentinel (TN) Online (10/13/02); Singletary, Michelle.

Abstracts Copyright © 2002; Information Inc., Bethesda, Md.