Total Monthly Obligation (TMO) represents the sum of all your legally required monthly debt payments. This figure is important because lenders use it to determine how much of your income is already committed to debt, influencing their decision to approve new loans.
TMO includes obligations such as mortgage or rent payments, car loans, student loans, personal loans, minimum credit card payments, and any required alimony or child support. It does not include everyday living expenses like groceries, utilities, insurance (unless escrowed in mortgage payments), or discretionary spending.
To calculate TMO, add all your monthly debt payments together. For example, if your rent is $1,500, car payment $350, student loan $250, and credit card minimum payments total $125, your TMO would be $2,225.
Understanding TMO helps you better manage personal budgets and loan applications. It forms the numerator in the debt-to-income (DTI) ratio formula: (TMO ÷ gross monthly income) x 100. Lenders typically prefer a DTI ratio under 43%, though requirements vary by loan type.
You can reduce your TMO by paying down debt, refinancing to lower payment loans, consolidating credit card debt, or avoiding new debt. This not only improves your chances of loan approval but also enhances overall financial stability.
For more on related financial concepts, explore our articles on Debt-to-Income Ratio and Credit Score.
Sources:
- Consumer Financial Protection Bureau: Debt-to-income ratio
- NerdWallet: What Is a Debt-to-Income Ratio?
- Investopedia: Debt-to-Income Ratio
