The Debt-To-Income Ratio

What is Debt-To-Income Ratio and how does it affect me?

Many are of the opinion that credit score is an important indicator of your financial health. Undoubtedly it is but there is another number that reflects your financial responsibility. It is your debt income ratio. DTI or debt-to income ratio is made up of a front ratio and a back ratio.

The front ratio indicates the payments you make for your mortgage. It includes PITI or the amount you pay for the principal amount, for insurance, taxes, interest etc. The back ratio includes the amount you pay for the aforesaid as well as payments you make for credit cards, student loans, alimony, child support, legal judgments etc.

Debt-to income ratio is calculated as – Total debt payments/ total monthly payments. It is expressed as percentage. Your debt income ratio is important as it helps lenders to determine your repayment capacity. Generally, 28/36 is a standard debt-to income ratio. And lenders prefer to extend mortgage to borrowers with this debt income ratio. However, there are variations to the 28/36 rule. The FHA or Federal Housing Administration allows you to avail loan if you have a DTI of 29/41. The required DTI also varies from one lender to another.

Having a good debt-to income ratio doesn’t necessarily mean that you qualify for a loan. This is just one of the various parameters for qualifying for a mortgage.

Your debt-to income ratio escalates if you avail more loans. Your debt income ratio is directly proportional to your financial well being. Higher is your debt income; greater are your chances of facing financial hazards.