Disposable Income to Household Debt

The ratio between your income and household debt is a debt-to-income ratio. The two types of debt-to-income ratios are front end and back end. When lenders use these ratios to qualify you for a loan, they use your gross monthly income. Lenders often consider 28 percent a healthy front-end ratio and 36 percent for the back-end ratio. If you want to calculate your debt-to-income ratios for personal use -- in making a plan to get out of debt, for example -- consider using your disposable income instead of your gross income.

Ratios for Personal Use

Your disposable income is income after taxes. If you are calculating your ratios for personal use, using your disposable income gives you a more accurate picture of your financial health because it is the money you actually have available to pay your monthly expenses. This is helpful when making a monthly household budget. Figuring out how much money you have left over after paying your household expenses is particularly useful when making a plan to become debt free.

Calculating Front-End Ratios

Since lenders use 28 for front-end ratios then it's a good idea that you keep your ratios around the same percentages. For the front-end ratio, divide your house or rent payment by your disposable income. If this percentage is near 28 percent, then your housing is affordable. If it exceeds 28 percent, you risk not being able to pay your rent or mortgage if you income decreases, your expenses increase or both.

Calculating Back-End Ratios

For your back-end ratio, you add up all of your fixed monthly expenses, including your housing payment. If you rent, just use the amount of your rent payment. If you have a mortgage, remember to include your principal, interest, taxes and insurance. Fixed monthly expenses are payments for loans, credit cards and court ordered support payments. Add up your fixed expenses and divide that number by your disposable income. If the number is more than 36 percent, your monthly expenses are not affordable and you may want to consider finding ways to cut these expenses.

Ratios for Lender Use

Lenders use these ratios to evaluate your credit risk. To lenders, higher ratios equal a higher default risk and low ratios equal a lower default risk. The higher credit risk you pose to lenders, the less likely they are to approve you for a loan. Knowing your debt-to-income ratios in advance of applying for a major loan, such as a mortgage, allows you time to adjust your spending habits and pay down your debts. Doing so may increase the likelihood of a lender approving you for a mortgage or another type of loan.