Having too much total household debt is a major cause for concern to many families throughout the country.
If you did jump here from "my debt payments are the problem," a review of whether or not that is true is in order. Financial professionals use "rules of thumb" which involve ratios to determine whether or not the portion of your income going to debt is too large relative to your income.
You will need at least two pieces of information to help you to use these rules of thumb.
The first is your mortgage payment which consists of your principle, interest, taxes and insurance. (If you have actually been following the Practice and Exercises instructions use the numbers you listed as Housing on your Worksheet. )
The second piece of information you need is the total of your monthly debt payments. You can get this from your Debt Repayment Schedule . If you have not included your car payment(s) in your schedule or other personal loans (such as student loans) make sure you also have those amounts.
But before you use these total household debt rules of thumb, keep in mind these are general guidelines.
Guidelines fall into the one size fits all categories. (Have you ever purchased a one size fits all hat and wondered where on earth those "all" are living?)
Financial institutions often use guidelines because they are not able to take into account many specific and personal situations or expenses that you may have. By regulation, many of the deeply personal questions that you to ask yourself before making a financial decision cannot be asked by lenders without the risk of violating discrimination regulations in one way or another.
Home lenders use a housing debt guideline to determine whether or not the portion of your income you will be spending when you apply for a loan is within certain guidelines. These guidelines sometimes differ from company to company, however, since most institutions actually sell their loans nationwide to other financial institutions standard guidelines have become commonplace.
The guidelines may also vary for various types of home loans, such as those guaranteed by the FHA or VA. (The reason should be obvious; a guarantee means someone else will pay the bill if the customer does not.)
Before the advent of "Alt-A" and "sub-prime" loans, mortgage lenders used standard underwriting guidelines which statistically proved that 97% of the home loans made would be repaid. (Which also means the borrower would be able to pay.)
These rules worked well for years and you should use them as your household debt guideline.
The second guideline assumes the portion of your income that you spend for "housing expense" is not too large. This is not a financial institution guideline; rather it is used by many financial professionals and counselors to determine whether or not the amount you're spending to repay your non-housing debt is too large a portion of your income. This measure of total household debt is used to determine if your consumer and credit card default risk is too high.
If you fall within the limits of the rules or guidelines, unless your unique circumstances dictate otherwise, your budget problem is not having too much debt - it is over spending in one or more other categories of your budget.
Total Household Debt Practice and Exercise: