Buying a home and becoming a homeowner may be a great feeling that can rarely be described in words but it requires a tedious process that one has to go through in order to get the keys to the house of your dreams finally. With home prices at an all-time high, you best believe that the task of purchasing a home has not only become more expensive but demanding as well.
Mortgage lenders have gotten extremely picky about who they are willing to trust so chances are your application is being assessed seriously and one way they do it is by observing your debt-to-income ratio. You are probably wondering what this debt-to-income ratio is all about. There's no need to wonder, here is all you need to know about the debt-to-income ratio and how to calculate it.
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What is the Debt-to-Income Ratio?
This ratio is based on your monthly income and the amount of money that you owe. Usually, your gross income is used to measure this ratio. If a person has a lower debt-to-income ratio then it shows that the said person is easily able to manage their income and their debt becoming a favorable candidate for the lenders. However, on the flip side if a person has a high debt-to-income ratio then it shows that most of what is earned goes into debt repayment which is generally a situation lenders avoid since they know that the borrower might have issues repaying their debt. However, one thing you should keep in mind is that the debt-to-income ratio isn't the determining factor as to whether you are going to receive a loan or not. There are numerous other factors that play a major role. With that being said, let's take a look at what is considered to be a good debt-to-income ratio.
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Determining the Good Debt-to-Income Ratio
Let's suppose that 20% of your income is going into general debt repayment, this could include your mortgage, car payments, credit card bills, student loans, or any other debt you have. This 20% is your debt-to-income ratio which is something you want to keep as low as possible. According to The Mortgage Reports, a decent debt-to-income ratio is around 43% or lower. In some cases, a debt-to-income ratio of 50% is also acceptable given the nature of your loans but anything above that is not a good sign.
While having a higher debt-to-income ratio doesn't become the sole reason for loan rejection but it can make it difficult for you to qualify for a loan. So, it's pretty important that you are aware of your debt-to-income ratio, here's how to calculate it.
Alexander/Pexels | If you have a higher debt-to-income ratio, it would leave you with a very small financial safety net
Calculating Your Debt-to-Income Ratio
The formula is simple and easy. All you have to do is to put together all your monthly debt payments and divide them by your total monthly income. For the debts, you will include all kinds of debts even if you think they don't matter.
Easy, isn't it? A debt-to-income ratio can also motivate you to pay off your debts and increase your income.