How Does a Lease Option Affect Your Debt to Income Ratio? By Nick Stoles At Isnare.com Ezine Articles

One of the most prominent words to ever become a catchword of the 21st century is debt, and this is something a great many people of the world can relate to. From a thought that is typically associated with people who live below the relative poverty line, debt is now something that is quite prevalent in people who live both marginally and quite well within the medium financial class of working people. The sheer number of people now who are in varying degrees of being drowned in debt is well past alarming levels, despite efforts by many financial institutions to stem the number of people falling into debt. The current economic pinch being felt around the world is further compounding the situation, and the series of companies closing their doors is making it even worse. This is exactly why people should really start looking at their own debt-to-income ratio, or DTI, before they resort to financial salvation adage that is growing in popularity right now: sell house.

But just what is a debt to income ratio?

A debt-to-income ratio or DTI is the percentage of a person’s monthly gross income that is dedicated to paying debts, although the term can also apply to more than just debts, such as certain taxes, fees, and even insurance premiums. Debt to income ratio is classified into two types:

Front ratio – this is the income percentage that is dedicated towards housing costs. For those who opted to rent a residence, their front ratio is the rent amount they set aside for payment.

Back ratio – this is the income percentage that goes into the payment of the typically recurring debt payments, sometimes including rent payments but not typically so. Back ratio income payments are usually those that go to credit card payments, car loan and student loan payments, and other legal fees, such as child support, legal judgments, and alimony payments.

So how does a lease option affect your debt to income ratio?

Knowing just what particular payments fall into the debt to income ratio, the effect of a lease option to your debt to income ratio will entirely depend on which end of the lease option you fall into. If you are the one who will lease a residence, then that means a significant chunk of your income will go to the payment of the residence you are leasing. Depending on what type and size of residence you are leasing, the payment could be anywhere between something that is easily set aside to an amount that may be considered as exorbitant by many.

On the other end of the deal, if you are the one leasing out a house that you own, the income you get from the payment of a tenant who leased the unit could very well be a boost for your personal finances, and aid in your budgeting of your income. It could go to either your typical front ratio, the overhead expenses at home, or add to your back ratio and be used for other payments, such as utilities, credit cards, and food and supplies for home.

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