What Is The Debt To Income Ratio In Home Loans And Why Should You Care?

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What Is The Debt To Income Ratio In Home Loans And Why Should You Care?

This story begins when you are looking for your dream home, everything seems to fine and on track. After lots of effort & site visiting, now you have finally found the dream home that perfectly fits in your budget and every expectation of your family. Now you are applying for a home loan, you have tested your credit score and it is also within the eligible range. But as you apply for the home loan in any reputed XYZ bank, your application is rejected. 

Now you are shocked, how it is possible when everything is fine?

If everything is fine then the Debt-To-Income ratio could be your weak point. This factor just like credit score matters a lot while looking for a home loan.

Debt-To-Income ratio

The debt-To-Income ratio as its name suggests is some percentage of your current income & debt. Don’t worry we make you clear everything about this factor.

The debt-to-income ratio is concluded by calculating your all monthly debts and dividing them by your monthly income. This factor helps banks & financial institutions to estimate the value of debt that you can comfortably repay. The one big difference between Credit Score and DTI is, in credit score you need a higher number and a lower number in DTI. 

How to calculate the DTI ratio of any individual?

You just need the basic maths calculation to calculate your DTI ratio. As we mentioned in the upper paragraph that you just need to sum up your monthly debts and divide the total amount with your monthly income.

Let's make it simpler for you:

  • Car Loan EMI – Rs. 8500
  • Two Wheeler Loan – Rs. 2500
  • Credit Card Bill – Rs.12000
  • Your total monthly debt is – 8500 + 2500 + 12000 = Rs.23000
  • Suppose your monthly salary is Rs. 1, 00, 000
  • Your debt to income ratio is: 23,000 / 1,00,000* 100 = 23%. 

This is the basic concept of DTI...

So, now before applying for the loan in the bank you can check your DTI ratio and prepare yourself for any obligation that occurs. Now you have learned how to calculate the Debt-To-Income ratio but, you need to find out where you exist in the DTI ratio.

Where you stand if your DTI ratio is  

35% or less – This is best. Your total debts are controllable and you can apply for more. 

If your Debt-to-income ratio is 35 or lower, then you are at a better stage and an eligible applicant for the banks. It means, after paying your monthly debts & bills you can handle more debts and able to repay without feeling any pressure or burden. 

36% to 49% - This is average. But, you need to improve your score. 

If you come under this range then still there are few chances of getting a loan easily, but we recommend you to work on this score for improvement. In most cases, banks are offering the best interest rate on low DTI, because it represents you are in a good position to deal with unexpected future expenses. 

More than 50% - This is bad and makes you ineligible, you need to improve your score right now. 

Banks consider applicants with higher DTI (50%+) risky borrowers, thus hitting your chances of getting the loan.

So, now you understand everything about the Debt-To-Income ratio and its impact on your home buying dream. For more information, you can contact any financial advisor.