Debt To Income Ratio
One of the main reasons why many Americans look to bankruptcy and other measures to clear their name from debt is because statistically as a country we have a very high debt to income ratio; sometimes way over 50% per household. This ratio can prevent people from obtaining financing, establishing credit, and can also get you in a major bind with many of your own creditors. You can calculate this by taking the percentage of the debt you have versus how much income you bring home.
It is always a good idea to figure out your debt to income ratio using the method that the lenders do. This will help you be knowledgeable about it, but also use the calculator to determine the mortgage that can be afforded. This will help you stay out of debt while buying a home.
What exactly is the debt to income ratio?
The debt to income ratio gives a snapshot of your ability to repay your loans. Thus, it is simply a measure of your attractiveness to financial institutions. Banks prefer debt to income levels that are less than 35% because this means that currently 35% of your gross income is used to repay debt obligations. This is considered an acceptable level and generally indicates that you should be able to handle additional credit and still manage to stay on top of your other living expenses.
Increase Your Income
It sounds obvious, but it’s always good to remember it: try to get a better paying job. Or, if the opportunity shows up and you’ve been doing a great job, ask for a raise. Depending on the company where you work, your performance, and they money you’re currently making, you could see an increase in your paycheck. If not, try to look for an opening that pays better. You can also do freelance work or take on a part-time job to supplement your monthly income.
Why Is It So Important?
This number tells lenders how risky it’ll be for them to give you any money and for you to pay them back. Lenders examine your debt-to-income ratio before deciding to lend you any money. For instance, a ratio of 80% implies that your monthly expenses are starting to overwhelm you. Thus, you’ll probably have a very hard time trying to get approved for a car loan, a mortgage, and sometimes even a credit card. The reason? You probably won’t be able to pay the lender back.
What Level Of Debt To Ratio Income Is Acceptable?
It changes from lender to lender. Many lender do not want to see your total monthly debt to ratio income to be over 38%. Some lenders will go as high as a 55% ratio. Keep in mind that the income here is pretax income.