An expensive home will increase your debt to income ratio.
The debt to income ratio is a simple but useful measure of a household's finances. The ratio is important for individuals to know because a high debt to income ratio can indicate future financial problems. This ratio is also important from the perspective of lenders who avoid loaning to people who have a high debt to income ratio.
Calculating the Debt to Income Ratio
To calculate the debt to income ratio a person first looks at the total amount of income coming in each month. Part-time jobs and spousal income should be included if you are measuring a household debt to income ratio. Next, the sum total of bills paid per month on debts that cannot be paid off within six months should be calculated. The ratio of these two numbers give the debt to income ratio, which indicates much money is left over for savings, upcoming expenses, and new financial obligations.
Target Debt to Income Ratios
The lower the debt to income ratio a person or household has the better. However, having some amount of debt is certainly reasonable. Individuals should set a goal of having a debt to income ratio of below 55 percent. Anything about 55 percent is viewed by lenders as risky. An even better goal is a debt to income ratio of below 20 percent, which is considered a good ratio by lenders.
Improving the Debt to Income Ratio
There are many ways to improve your debt to income ratio. One way is to pay down debt. This can be accomplished by creating a budget that will help you see areas where you can spend less leaving more money for extra payments to creditors. Another way is to take on a second job or start a part-time business. Another idea that might help homeowners to improve their debt to income ratio is to consider refinancing.
Factors Lenders Consider
It is well known that lenders consider a person's credit score when a person applies for a loan or a home mortgage. What may be less known is that creditors will also look to debt to income ratio. The reasons for this are fairly straightforward. A company has a much better chance of being paid regularly and in full by someone who has a lot of extra income compared with what she already owes.
Considerations
One of the best ways to keep your debt to income ratio under control is to avoid taking on too much debt. It has come to be a cliché, but in a turbulent economy you may not always be sure of your income. Avoiding debt and even building up some savings, will greatly improve your financial outlook in the future.
