Manage Debt to Income Ratio

Manage Debt to Income Ratio

Manage Debt to Income Ratio

You might be asking yourself “How do I manage my debt to income ratio?”  Understanding your debt to income ratio is extremely important in managing your debt. Unfortunately; however, many people fail to understand this very important concept and as a result their credit scores suffer. Regardless of whether you are currently considering taking out a loan or you are looking at ways in which you can pay off your current debt load it is imperative to always keep a watchful eye on your debt to income ratio.

Basically, your debt to income ratio is a simple formula used to describe the percentage of your income that is available for a loan payment after all of your other financial obligations are met. While other factors are also taken into consideration when you apply for a loan, the debt to income ratio is an extremely important deciding factor regarding whether you can be approved for a loan.

Generally, there are limits regarding what a conventional lender will accept for your debt to income ratio. In the mortgage market, lenders do not like to see anything above 28/26. The 28 in the ratio describes the amount of your monthly income that is applied toward housing expenses. This includes not only your actual mortgage payment but also other expenses such as property taxes, homeowner’s association dues, hazard insurance and private mortgage insurance.

What Should My Debt To Income Ratio Be?

What Should My Debt To Income Ratio Be
The second number in the ratio, 36, refers to the amount of your monthly gross income that is applied for recurring debt, including your housing expenses. It doesn’t take a math genius to figure out that if a lender will only allow 28% of your income to go toward housing and if you are at that cap already, you only have roughly 8% left to go toward other types of recurring debt. Lenders include such expenses as credit card payments, car loans, child support and any other obligations that won’t be paid off within about a year’s time frame in the term ‘recurring debt.’

As you can see, if you have a lot of recurring debt already, this can tremendously affect your ability to receive a mortgage loan. Each year many people apply for mortgage loans only to be turned down because the amount of monthly recurring debt they are already carrying is so high it doesn’t leave enough room in their debt to income ratio to allow for even a modest mortgage payment.

By keeping a vigilant eye on your debt to income ratio you will be better able to manage your debt and not become victim to an unpleasant surprise the next time you need to take out a loan for a large purchase.  If you can “manage debt to income ratio” you’ll be able to qualify for a higher mortgage loan.

Leave a Reply

Your email address will not be published. Required fields are marked *