The key formula to borrowing as an individual or a small business is the debt to income(DTI) ratio. The formula is defined by dividing your gross monthly debt (recorded on the credit bureau) by your gross monthly income. A calculation of less than 50% should be the borrowers goal to maintain over a life of doing business. The lower the DTI the better chance an individual will have at qualifying for a personal or small business loan.
I have had countless amount of experience working with individuals on strategies to improve the numerator and the denominator of formula. The majority of the time it’s the debt load that drives up the DTI calculation. Home mortgage, car payment and student loans must be factored in when making financial decisions in the future. Many entrepreneurs fail to consider personal debt as business debt. Understanding the combination of the two is critical.
If you are considering being entrepreneur or making a first time home purchase. You must master your DTI ratio. The fundamental understanding of this formula should be a household’s foundation borrowing money. The formula should be considered for every debt transaction in order avoid the trap of becoming over leveraged (high amount of debt).
What’s the Mathematics?
Definition: Gross Monthly Debt(Mortgage, Car Payments and Credit Cards) Divided by Gross Monthly Income