What Is Debt To Income Ratio?
The consumer debt to income ratio, or DTI as it is commonly abbreviated, is a tool that can be used in various ways to help understand your financial responsibilities and abilities. Your debt to income ratio is especially important when you are ready to buy a home and need to qualify for a mortgage loan. A lender usually requires that a loan applicant meet, or fall below, a specific DTI percentage.
One of the most important uses of the debt to income ratio occurs when you are ready to purchase a house. Lenders will evaluate your ratio and use it to determine if they will approve your home loan, as well as how much your home loan may amount to. By looking at the amount of income leftover after you have met all of your other financial obligations, the lender can determine how much of your income will be available to place towards a mortgage payment each month. There will often be a certain ratio that you must meet in order to qualify for a home loan at all. In fact, the DTI numbers are just as important as your credit score in the eyes of your potential lender.
One of the most useful things to know about the ratio is to understand what each of the numbers mean. The first percentage number represents the largest possible percentage of your gross income in one month that the lender will allow for your housing expenses. The second number adds the percentage of your monthly income that goes toward paying your debts along with the first percentage in the pair.
It is often helpful to have a general idea of what types of numbers are realistic for most people to have as their debt to income ratio. The following stats will give you a good idea on where you should be found in order to keep your finances in good health. It is ideal to have a DTI of less than 30 percent. However, numbers between 30 and 36 percent are also seen as good ratios and most lenders will accept these values. If your DTI is over 36 percent, and especially over 40 percent, you should work on your credit situation as you are more than likely struggling to make the necessary payments on your debts.
There are other benefits to keeping your debt to income ratio low. The first and probably most important benefit is the ability to increase your savings if you are paying a lower percentage to your debts every month. Having a healthy savings account or plan is essential when you begin to plan for retirement or face unplanned and unexpected expenses. By keeping your DTI low over the years, you will be better equipped to handle your finances without turning to additional lenders in the future.
Justin Biggs is a certified debt advisor. To calculate your DTI, visit Debt to Income Ratio
Source: http://ezinearticles.com/
Added: April 24, 2008
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