Understanding Your Debt to Income Ratio

Your debt to income ratio can have a tremendous effect on your ability to get a loan.

There are many factors that can affect your ability to secure a loan, and one of the biggest is your debt to income ratio. Those that head out to purchase a new car or even more importantly, to apply for a mortgage on a home will have their options limited by their debt to income ratio.  This number is important to lenders who are considering giving you credit because it gives them a good picture of your debt load and your ability to pay down a future loan.

What Is Your Debt To Income Ratio?

The first thing you need to understand it just what this number is. To calculate debt to income ratio, you need to do some simple math:

  • Add together all of your income including things like salary, bonuses, tips, alimony, government assistance, anything that you bring in on a monthly basis.  All income for one month.
  • Next, add together all of your debts.  This should not include your mortgage-yet.  It should include bills that you have, loans, credit cards (with minimum payments) and any other payment you make monthly, except for utility bills.
  • Divide your monthly debt payments by your monthly income to calculate your debt to income ratio.
    • Ex. $1725 / $5500 = .3136 x 100 = 31.36%

When you do not include your mortgage payment (if you have one) you can get an idea of what the lender will see when determining if you qualify for a home loan. When you add in your monthly mortgage payment, you are seeing the complete picture of how much you are spending and how much you are bringing in.

Where Do I Fit In?

Where do you stand?  Once you calculate debt to income ratio, then you can see what a risk you are to the lenders. Here is some help without your mortgage included.

  • Less than 15%:  Excellent debt to income ratio. You are an ideal candidate.
  • 16-20%:  You are still doing fairly well.
  • 21-39%:  This is a fair to poor debt to income ratio. They may still give you credit, but you may pay more for it in a higher interest rate.
  • 40% and up:  Here, you are a big risk to the lender. They may or may not allow you to get credit.  You have high debt to income ratio and this sends up a sign to the lender that you may not be able to pay for all your bills.

How Does It Affect Me?

If you have a higher debt to income ratio, you are less likely to be able to secure the interest rate that you want.  That means it is harder for you to get loans for a car or for a home.  Obviously, the lower the better when it comes to your debt to income ratio.

The Bottom Line

Does that mean that you have to work harder?  Not necessarily.  What you need to do is work on lowering your overall debt load. It’s all the more important to consider your options to reduce your debt load.

Debt settlement can greatly reduce your debt load and increase your debt to income ratio tremendously.  People who have used debt settlement have often been able to secure mortgages and other loans at a much better rate than without it.  Consider hiring a debt settlement company to take care of the details and get you on your way to a better debt to income ratio.

If you can not lower your debt load, consider adding additional income, such as a part time job.  This number is very important to your overall credit worth so working on improving it is necessary to maintain your good credit standing and well worth the time spent.

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