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OKdon
Senior Contributor

Know what you can comfortably afford

A news letter from my bank. "Know what you can comfortably afford" "As a general rule of thumb is your debt to income ratio (DTI) should not exceed 43% of your gross income."

 

So if your gross income is $500K you can afford  $215K of debt. How does that compare with what you are doing? Or isn't that applicable to your business?

2 Replies
BA Deere
Honored Advisor

Re: Know what you can comfortably afford

If I remember right, they used to advise that you not spend more on a home than 2 1/2 times your income, I think the past few years that was blown out of the water with the subprime "everybody gets a house!!!" philosophy. 

 

What got the farmers in trouble in the 80`s PCA and other banks told farmers in the 70`s that to have 2/3rds debt and 1/3 assets was the most efficient opperating mode...well land dropped by 2/3rds and all of a sudden, those that took that advise were underwater in just a couple years...add 20% interest and mix...

 

But if you make $500K and all your debts including your mortgage is $215, you`re in good shape.   If that $215K is all in 18% credit cards, then you`d better be doing something fast.

 

That advice on the amount of debt must mean your personal gross income, not applicable to "gross farm income"...or they`d describe every farmer as "uncomfortable"   Smiley Happy

OKdon
Senior Contributor

Re: Know what you can comfortably afford

Sometimes there is more than enough assets to pay the debt.. Unfortunately there are not enough after tax assets to offset the debt. say you are in arrears some $250k on asset of long term debt. You have $250K in current assets but after the taxes you have somewhat less to satisfy the current debt. Plus you are not likely to get another loan if you are struggling now. The bank may suggest selling part of your existing property to lighten the load and negotiate more workable terms.

 

It's folks that refuse to work with the lender that find themselves sool !!