Debt-to-income ratio, which is the percentage of your income used toward paying off your monthly debts, plays a major role in your eligibility to a mortgage. This figure helps lenders to ascertain how much monthly payment you can afford for your home loan. It is the most important factor to calculate your eligibility Apart from your credit score and job stability. All your debts are taken into consideration by the lenders and are divided by your gross income. Ideally, it is best if you have a ratio which is less than 36% to get a home loan easily.
Types Of Ratios
Debt income ratio or DTI does not include utilities, food, health insurance and transportation in its calculation. There are two types of DTI ratio in the finance industry. One is the front-end ratio, which is also known as the household ratio, is calculated by all the expenses that are related directly to your home. All factors like property tax, proposed monthly payment for mortgage, insurance, and other association fees are taken into account and divided by your gross monthly income. When all your debt obligations including credit card are taken into consideration along with household expense for calculation, such DTI is called back end ratio.
Difference Between Them
Back end ratio is a bit higher than the front end as all your debts are taken into account and lenders prefer the back end ratio to the other type. For all conventional and other online mortgage loans other than government programs, back end ratio is preferred. For all nonconventional loans, lenders look at both the ratios and consider the one which is higher than those which is required for conventional loans. Depending on the lender these limits can vary but for you, it is ideal to keep your DTI as low as possible. This will help in your credit score and lower the rate of interest on the mortgage.
Look Beyond It
It is good to know that DTI ratio is not the only factor to get a home loan and decide how much you can pay per month. As you know that DTI calculator excludes regular and unavoidable expenses like utilities, health, and food, it is ideal for you to keep your DTI ratio far less than 36% so that you can meet all your expenses efficiently. If it is high, then you must wait for some time and budget your family expense so that you get your financial status in order. It is better to apply later and get approved than to get rejected in the present financial condition.
Ways To Lower DTI
To keep you DTI ratio low, there are several ways for it. If you are in debt already, then you should avoid taking more debt and pay off most of your current debt as fast as possible. You should also abstain from making any big purchases on credit. Pay off the high interest rated loans first which will boost your credit score and also get the benefit as lenders often forgo a few months of payments left for some debts.
If you are using your credit cards very often then you really need to know how to consolidate credit card debt. This is very important so that you can make things easy for yourself and lead a happy and tension free life.