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Debt to Income Ratio Formula (Examples) | DTI Calculation - YouTube
Channel: WallStreetMojo
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hello everyone hi welcome to the channel
of WallStreetmojo watch the video
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till the end also if you are new to this
channel then you can subscribe us by
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clicking the bell ican friends today we are
going to learn a concept which is known
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as debt to income ratio formula
once again important thing for the
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financial institutions which they
consider they want to exactly see that
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you know whether your monthly debt
payment is able to be covered up from
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the gross monthly income so year the
calculation is going to be on the
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monthly basis they want to have a check
on how far the the profit and loss
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account for the gross monthly income is
healthy if it is not then probably it's
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not a good idea to send your money into
your car into companies pockets probably
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it's gonna be a stupid mistake to do
just like IL & FS and Jet Airways
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which are having amounted with a turn
amount of debt and they're defaulting it
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so let's understand this formula and get
into the nitty-gritty of the scene the
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debt to the income ratio formula is your
monthly debt payments and the divided by
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the cross monthly income the first in
for most thing what we need to learn over
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here that before an investor decides to
learn a certain amount to a company or a
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firm the investor needs to know that the
firm is earning enough I mean monthly
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wise we are talking about you to pay off
his lending amount so this can be true
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for an individual borrower also I mean
you cannot just stick to a company
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uniform the formula is the debt to
income ratio is equal to your monthly
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debt payment divided by the gross
monthly income right so this is the
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formula let's get into the example
portion of this so that you may have an
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idea of what exactly the formula is
talking about you know let's take an
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example to illustrate the debt to income
ratio which is this is also known as the
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DTI formula let's say there's a guy
called David and and he has applied for
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a credit card and he finds out that the
credit card would be useful to him for
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smaller purchases so the credit card
company asks David for some sort of
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proof of his office like monthly income
and the credit card company finds
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that David he earns around 10,000 per
month I mean talking about $10,000 per
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month so close enough to
$1,20,000 per annum so after few days the
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credit card company informs David that
he's eligible for the credit card and
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from from this example what we we can
interpret that David is eligible for the
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credit card because the expected monthly
debt payment is far less than David's
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monthly income so if we use the formula
we understood we understand this clearly
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let's say the expected monthly debt
payment is standing at just at $2,000 so
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the credit card companies have
restrictions that an individual can only
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expend a certain amount using this
formula the debt to income ratio we have
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the expected monthly monthly debt
payment divided by the David's monthly
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income right so let's put down some
numbers over here let's crunching the
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numbers the monthly income was 10,000
divided by 2,000 that gives us five the
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expected monthly debt payment divided by
the monthly income so it's 20% so
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since the expected monthly debt payment
is just 20% over here of David's
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monthly income so the credit card
company decides to go ahead with David's
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application for a new credit card so
this was just a number crunching game
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but we need to understand the
explanation part so they so that we have
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some really crystal clear idea regarding
what exactly we are talking about see if
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an individual takes a loan the lender
needs to know whether the individual is
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capable of 4 enough to pay off its
monthly due to so for example
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if an individual who wants to buy a
television on equal monthly installments
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he or she needs to produce some proof
for a monthly income to the lender so
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that the lender can check whether the
individual has been earning enough to
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pay off the monthly debt debt payment
right so this scenario also happens with
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the form 2 if a smaller firm goes to a
bank
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and asked for a loan the bank will first
see how much the firm exactly they earn
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and and earlier I mean I'm talking what
do we hear yearly usually over here in
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this formula we are talking about
monthly so and and and quarterly or
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monthly so if the profit of the form is
enough
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the bank will surely accept the loan
proposal right now and and and to
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calculate whether individual form is
worthy of a loan we use the DTI formula
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now what is exactly the use of this
particular formula see the debt to
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income ratio formula is used very
broadly as for an example if you apply
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for a personal loan the lender will
check the debt to income first this is
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the first criteria now if you apply for
a credit card then the lender will check
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whether you have enough monthly earnings
to pay off the new amount right even for
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the mortgage acceptance the debt to
income ratio is use Sal take example of
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mortgage for credit card and the most
generic form of checking whether they
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knew it is worthy of getting a mortgage
loan or not is to see whether the total
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debt to the monthly income is the ratio
is is 36% or less just an a while guess
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36% or less so if the total debt payment
is let's say around 50% the
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individual may not be worthy to get the
mortgage loan in this particular
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scenario now as I was talking about
there is a company called IL & FS they
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had they had mounted with the turn amount of loan they had been given a AAA
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rating by the rating companies a couple
of months back this is a very recent
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example just within the few weeks they
got a rating of D from AAA to D now
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this is like falling from a cliff I mean
why would someone get a D from AAA
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the reason being is that you know they
tried they started defaulting on all
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their loans it was a serious and a
normal situation for the company
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there was an immediate steps that had to
be taken just to revive to recover the
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company from such situation and this
kind of situations actually is a
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question on the financial situation or
the financial health of the company as
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well as the country itself so remember
one thing this ratios the debt to income
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ratio the debt coverage ratio there is
one more called the the most important
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and and and this is really very
important the debt service coverage
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ratio so it's also known as the DSCR
this is the most important in the white
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r ratio which every company considers
before going for for before lending the
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amount of their come let's put down some
numbers over here monthly income monthly
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income over here the gross sorry this is
monthly debt payment we're just trying
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to input the data in our gross monthly
income and finally the debt to income
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ratio formula so let's try and input
some numbers to determine the relation
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between this let's say your monthly debt
payment is standing at 4,000 and your
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income is 10,000 now your debt to
service coverage ratio is going to be
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0.4 now instead of this if we increase
the debt and the gross monthly remaining
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the same for the same year right so this
will automatically change right from the
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debt to income ratio is 50% now it has
increased to 15% so as you go on and on
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increasing this amount by 1,000 your
amount your ratio is gonna go up right
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so remember one thing there is a direct
relationship between the monthly debt
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payment and the debt to income ratio as
the monthly that increases your debt to
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income ratio is also gonna shoot up and
as we decrease over here the amount
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keeping this as 10,000 it will directly
jump to 30%
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so this is all is you can make your own
relations you can make your you can come
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out with some really good conclusions by
putting down your own figures so that's
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it for this particular topic if you have
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