What is debt to income ratio and what it means for your credit

Along with your credit score, your debt-to-income ratio is a crucial data point used by lenders to determine whether a consumer will be approved for certain types of loans. Your debt-to-income ratio compares your gross monthly income with your monthly debt payments and is designed to help lenders determine if you’ll be able to take on another loan payment.

Depending on the institution and type of loan, lenders each have a range of debt-to-income ratios that they accept. Knowing your ratio and what it means to lenders can be the first step to understanding what types of loans you can apply for and which ones you might get approval.

What Is an Ideal Debt-to-Income Ratio?

There is no one debt-to-income ratio that all lenders require. Rather, your ratio is just one of the components of your financial profile that lenders will look at when considering you for a loan. That said, certain lenders do prefer that their borrowers’ ratios remain below certain levels.

A conventional home loan or mortgage is a type of loan that is not backed by the government and is given to the borrower directly from a bank, credit union, or mortgage lender. According to Fannie Mae, one of the largest purchasers of conventional loans, in order for them to buy a conventional loan the borrower’s ratio has to be 36% or lower. For borrowers with credit scores and assets over a certain threshold, the maximum ratio can sometimes be as high as 45%.

When it comes to other types of loans, like a personal loan, the limit for ratios may be higher than for mortgages, as the size of the loan will in many cases be smaller. Still, the lower your ratio and the higher your credit score, the better positioned you are to get the specific loan that you might want.

How Can I Improve My Debt-to-Income Ratio?

While there are many credit options available for people with different DTIs, you may still want to lower your ratio so that you can know more about where you stand when applying for different loans.

There are really only two things you can do to help improve your debt-to-income ratio:

  • Increase your monthly income
  • Decrease your monthly debt burden

Once you do either of these two things, plug your new monthly debt payment or gross income back into your ratio calculation and you will find that your percentage has decreased.

We can definitely help each and EVERY situation, please give us a call at 844-FIX-URCR or http://bit.ly/csaelpappt to schedule your FREE consultation!

*Individual results may vary. Please call for more details and to discuss your own individual situation.

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