You may have heard a lot lately about debt credit ratios as consumers take matters into their hands more and more in evaluating their own debt, but what about the debt income ratio? Let’s explore why that is so important too—often on a more substantial level—and exactly who is going to be taking note.
When examining your debt-to-credit ratio, potential lenders get the scoop on your utilization of credit. They are looking at what is being offered to you, and what you are using. But let’s say you are hoping to buy a new home. This is generally the biggest ticket item most of us will ever hope to purchase, aside from something like a business (or raising capital for one). The lender needs to have a comprehensive picture of your personal balance sheet, along with understanding how much credit you have and how much you are spending. They want to know what your income is from every direction—and exactly where it is going. And while opinions vary on what is the highest ratio you can have and still hope to get a loan for a mortgage, most agree that if it is above 43 percent you may need to back up and work on eliminating some debt—or raising your income.
Calculating the income-to-debt ratio may seem intimidating at first, and especially if you aren’t a fan of math and percentages; however, the most difficult part is probably just compiling debts. To get started, add up your monthly income, and then account for all your monthly debt payments. You might be amazed at how one thing after another seems to come out of the woodwork once you get past listing essential bills. And don’t forget items like family support or student loans. Add all those payments up and then divide them by your gross (before taxes) income received each month. You can also use a handy online calculator, once you have your numbers in order.
It makes sense that lenders would have reservations about a high debt-to-income ratio as the consumer just does not have as much latitude for making payments. Still, if you are hoping for a loan, there are numerous lenders who will look at other aspects of your finances and may make exceptions—and there are also other ways to get creative such as seller financing or rent-to-own deals.
You may find that currently your biggest challenge is in eliminating some of your debt. If your DTI ratio is above 46 percent, you may need to look at more aggressive solutions. This can be achieved in numerous ways, but it is important to have advice from experts like the consumer and debt protection attorneys at Fitzgerald & Campbell, APLC.