- There are two main ways that debt is divided up, installment debt and revolving debt. Installment debt refers to payments that are fixed and will be paid back on a set schedule, such as car loans, student loans or home loans. Revolving debt is based on a percentage of debt owed and usually comes from credit cards or credit accounts. According to Carlo Dellaverson of CNBC, installment debt is considered to be less risky and good debt when compared to revolving debt.
- Lenders and banks will figure your debt down to a monthly payment amount. This is done by determining the minimum payment that must be made on each debt you owe. The balances are not considered as part of the calculation, except lenders may not consider installment debt that will be paid off in the next 10 months. Lenders add up the minimum payments to come up with a monthly debt amount that you owe.
- There are two debt-to-income ratios that are widely used to determine home loan qualifications. The first is to consider your total debt including your expected housing costs divided by your total monthly income before. Housing costs include the principal and interest on the loan, as well as insurance and property taxes. Also lenders will divide the housing costs by your total monthly income before taxes to determine your housing expense ratio. These calculations are stated in terms of a percent by moving the decimal point of the resulting figure, two places to the right.
- According to Lending Tree, a common rule is that total debt to income should not exceed 36 percent. In addition, Lending Tree says that housing expense ratios should not be more than 28 percent. Having ratios that are higher than those may not exclude you from a loan because lenders will look at other factors, such as credit score, income, job stability and credit history. According to Lending Tree, some lenders accept higher ratios that are more than 40 percent though you could pay a higher interest rate because of the high ratios.