When we find ourselves in financial hardship, we often look to loans for help. Loans have become our saving grace in times of financial difficulties, and one cannot imagine life without them. While the concept of getting a loan seems appealing, you must note that getting them isn’t easy. A lender wouldn’t want to loan money to someone who wouldn’t pay it back. Thus, before approving your loan request, the lender usually checks a few things, and one of them is your debt-to-income ratio. You need a good debt-to-income ratio to get a loan. That said, what is a good debt-to-income ratio?
A good debt to income ratio is anything below 36%. If it is between 36% and 40% it also counts as not bad, however, with such a DTI, you may find it hard to obtain a loan with favorable payment terms.
Before offering you a loan, lenders will want to make sure that you can pay them back. In order to do so, these individuals or agencies will scrutinize your financial background and debt profile to determine your creditworthiness. They’ll check your credit, your income and employment history, liquid assets, the collateral value (if the loan requires one), and your debt-to-income ratio. To acquire a loan with a favorable repayment term, you need to have a good debt ratio. But what is regarded as a good DTI ratio? In this article, you’ll find out.
How Much Money Can You Keep at Home Legally?
What Is a Good Debt-to-Income Ratio?
The act of lending individuals money is a very lucrative business and not some charity. Lenders and credit companies make a lot of profit from this venture, and they’ll do anything possible to ensure that it doesn’t change.
Discard the thought that you could get a loan by simply applying. It usually doesn’t work that way. The lender or Credit Company will often ensure that you can pay back what you owe. They usually don’t care about your financial situation; what they care about is getting their money back. And to be certain that you’ll pay back what you owe at the right time, these lenders will be keen to know your creditworthiness. To do that, they take a look at some factors for insights.
Some of these factors are your income to debt ratio, credit, employment history, etc. One of the factors these lenders often scrutinize is your DTI ratio. You need to have a good DTI ratio to access loans, especially those with favorable repayment terms.
What is DTI?
Your debt-to-income ratio (DTI) is your entire debt payments divided by your gross monthly income. It is an important data point used by lenders to determine your creditworthiness. When you apply for a new loan, this data helps lenders judge how easily you could take on an extra monthly payment. No one would want to lend money to an individual who is already swimming in a sea of debts.
DTI is a factor all lenders consider. Thus, if, for instance, you have mortgage debt and you are considering applying for a personal loan. You need to ensure that your mortgage debt to income ratio is good.
Lenders use your DTI ratio, including other aspects of your financial profile, such as your credit history, to make decisions regarding your debt application. Before understanding why this factor is very important, you need to know how to calculate your debt-to-income ratio.
How to Calculate Your Debt-to-Income Ratio?
You need to learn how to calculate your debt-to-income ratio since it is key to obtaining loans from lenders. By knowing your DTI, you should determine if you are eligible for a loan or not. With this information, you should know what to expect from a lender.
How do you calculate your DTI ratio?
First off, you need to figure out how much you pay each month towards your existing debt and divide that figure by your overall gross monthly income.
For instance, if you pay $2,000 for your mortgage each month, $200 for your student loan payment, $200 for credit card bills, and $600 for other sundry debt payments, your overall monthly debt obligation or the sum of your monthly payment is $3,000.
Now, imagine that your annual salary before tax is $90,000. Divide $90,000 by 12 to determine your gross monthly income, which is $7,500.
Finally, divide your overall debt obligation, which is $3,000, by your gross monthly income, $7500. Afterward, multiply the answer by 100 to convert it to a percentage. The final answer you end up with is your DTI ratio. In the example given, the debt-to-income ratio is 40%. In this case, the DTI obtained shows potential lenders that 40% of your gross monthly income is being used to cut down your debt each month, and 60% is remaining for other monthly expenses.
A 40% DTI ratio is not bad. With this DTI ratio, you can qualify for some loans. A DTI ratio of 43% remains the highest DTI ratio one can have and still qualify for a mortgage.
That said, let’s revisit the main topic of this article: What is a good DTI?
A DTI of 36% or lower is regarded as a good DTI, and this is because most lenders, if not all, will want to lend money to an individual with such a DTI ratio.
If you have a high DTI, below are a few ways to lower it:
- Avoiding racking in more debt
- Increase the amount you pay monthly towards your debt
- Postpone huge purchases, so you are using less credit
What Is the Minimum Monthly Payment on Medical Bills?
What Is an Acceptable Debt-to-Income Ratio?
Obtaining a loan isn’t easy, especially when your creditworthiness isn’t appealing. Before you decide to request a loan, I’ll advise that you do some background checks, so you know what to expect and don’t end up wasting your time. One of the aspects of your financial profile you should be checking is your debt-to-income ratio. Without an acceptable DTI ratio, obtaining a loan will be difficult. That said, what is an acceptable DTI?
An acceptable DTI should be below 36%. Some lenders wouldn’t approve your loan request unless your DTI is 36% or less.
To increase your chances of obtaining a loan, try to cut down your DTI. I outlined a few ways above. Adopt these methods to reduce your DTI and raise your chances of getting a loan.
