Money Monday: Debt-To-Income Ratio Impact On Credit

It is Money Monday, and our money expert Paul Hood joined News On 6 at 4 p.m. to discuss something that can have a big impact on your credit but most of us do not understand why.

That would be the debt-to-income ratio, and why it's important.

Hood: Ratios like this help financial institutions decide whether this is a good risk or a bad risk. What people need to understand is pretty straightforward. If you've got a job and you've got some credit card debt, a couple of car payments and a house payment, okay, that's a real easy ratio. It gets gray when, let's say you've got a job, plus you've got some rental property, or you own your own business. So somebody who has a job buys a truck, has a payment and has his income. They calculate the ratio. If you own a business and you buy the truck, and you deduct the truck from your business, it lowers your income, which affects that ratio. And so in effect, you're getting double counted for that. Or if you've got a rental property, and there's a timing difference between depreciation and cash, then it lowers your income, which lowers that ratio. So if you or anything outside of just having a job, you really can't just go and give your information to a bank, because a lot of times the bankers don't ask that question.

Coop: Is there a way we can work around this?

Hood: A lot of our business clients, and me included, I always have to give an Excel spreadsheet. This is what my tax return income was, and add back things like a home office. Same thing, with the home office. I'm going to have to pay my utility bills anyway, but being able to deduct them against my income, it lowers my income. So you have to add back all of these things that lower your income, which is great for taxes, but it's horrible for trying to get a bank loan, so you have to do that calculation for your banker.