Business

The Importance of Debt to Income Ratio

Mortgage and loan button on a keyboardAre you planning to get a mortgage soon? If so you, then you should review your debt to income ratio. The latter is one of the determining factors whether a lender approves your loan or not. Understanding its importance enables you to improve your chances of getting a loan.

Primary Residential Mortgage, Inc. shares some insights about debt to income ratio.

Ability to Pay

Lenders review the ability of their potential clients to pay before agreeing to grant a loan. They would like to know how much debt a person can take before they have difficulties paying for them. The financial capacity to pay bills on time, a stable source of income, and a good credit score aren’t enough. A lender will review the ratio before making the final decision.

If the ratio is too high towards debt, it may mean a person is on the edge of their financial ability. One bad debt or job loss may lead to instability in the long run. The debt to income ratio is a comparison of monthly debt and expenses compared to how much you make.

Improve the Ratio

Experienced mortgage professionals note that you can improve the ratio and boost your chances of getting a mortgage in the following ways:

  • Pay extra every month; this approach reduces your debt faster
  • Postpone or completely avoid taking on additional debt, whether it’s charging on your credit card or another type of loan
  • Delay making huge purchases, such as a car or the latest gadgets. This allows you to save more and pay a bigger down payment once you finally need to make one.

Many lenders agree that a ratio of 28% to 36% is ideal. These percentages show that you can pay your loan and keep up with other debts and expenses without going broke.