Sara Jones is a single, employed woman with a gross (before taxes) monthly income of $4,000. She pays her rent of $1,000 on time every month. Sara has several credit cards with payments totaling $350, but they are not delinquent because she makes sure to send in the payment due each month, even if some payments are a little late. She also has a student loan payment of $100 each month. Sara's car payment each month is $400. Sara decides that she would like to begin looking for a home and applies for a loan through her bank but is turned down for the loan. She wonders, "How can I be turned down when I pay my bills each month?"
In all likelihood, after pulling Sara's credit report and looking at how much Sara owed in comparison to her monthly income, the bank felt that Sara posed a high credit risk and would be less likely to repay the loan. Many financial institutions agree that your debt to income ratio should not exceed 36% of your gross monthly income. In the scenario above, the total monthly debt is $1850. To determine what your DTI ratio is, divide your monthly debt payment by your monthly income.
• Monthly income: $4,000
• Monthly debt payment: $1,850
• Debt-to-income ratio: $1,850/$4,000 = 46%
If you have a ratio of 30% or less, it means your income is significantly more than what you owe. However, if you have a ratio of 44% or higher, it means you are taking on too much debt in relation to your income, in the eyes of mortgage lenders. Even though there may be some lenders willing to offer a home loan to high risk consumers, the interest rate is usually very high.
A simple formula to calculate your debt-to-income ratio (DTI) is to take your monthly long-term recurring debt payments such as your rent/mortgage, credit cards, auto, insurance premiums, student loans, alimony, child support, and government liens and divide the total by your monthly income. Any debt that will be paid off within six months by making your normal payment does not need to be included in your total debt payments. Monthly food expenses, utilities, and other expenses are not included in the DTI ratio. Even though you will definitely want to budget for these expenses, they are not used by lenders when calculating.
Wondering what to do if your DTI ratio is too high? Two options are available, increase income or reduce expenses. The first step would be to develop a workable budget and find creative ways to free up money and reduce your overall debt. (Developing a budget is explained in my three-part series of Identifying and Assessing Priorities - Needs, Wants, and Recurring Debt.)
Lenders calculate your debt-to-income ratio to determine how much mortgage you can afford. Even if you are a current homeowner and consider refinancing for a lower interest rate, DTI is looked at when determining if you qualify. What better feeling is there than to go in knowing that your debt-to-income ratio is strong? Of course, this is only one step in strengthening your financial health.
To view other articles by this author, please visit [http://www.savycents.com/]
or
Contact me at mcnuttgreen@aol.com
Article Source: http://EzineArticles.com/?expert=S._M._Green
Article Source: http://EzineArticles.com/8583402
In all likelihood, after pulling Sara's credit report and looking at how much Sara owed in comparison to her monthly income, the bank felt that Sara posed a high credit risk and would be less likely to repay the loan. Many financial institutions agree that your debt to income ratio should not exceed 36% of your gross monthly income. In the scenario above, the total monthly debt is $1850. To determine what your DTI ratio is, divide your monthly debt payment by your monthly income.
• Monthly income: $4,000
• Monthly debt payment: $1,850
• Debt-to-income ratio: $1,850/$4,000 = 46%
If you have a ratio of 30% or less, it means your income is significantly more than what you owe. However, if you have a ratio of 44% or higher, it means you are taking on too much debt in relation to your income, in the eyes of mortgage lenders. Even though there may be some lenders willing to offer a home loan to high risk consumers, the interest rate is usually very high.
A simple formula to calculate your debt-to-income ratio (DTI) is to take your monthly long-term recurring debt payments such as your rent/mortgage, credit cards, auto, insurance premiums, student loans, alimony, child support, and government liens and divide the total by your monthly income. Any debt that will be paid off within six months by making your normal payment does not need to be included in your total debt payments. Monthly food expenses, utilities, and other expenses are not included in the DTI ratio. Even though you will definitely want to budget for these expenses, they are not used by lenders when calculating.
Wondering what to do if your DTI ratio is too high? Two options are available, increase income or reduce expenses. The first step would be to develop a workable budget and find creative ways to free up money and reduce your overall debt. (Developing a budget is explained in my three-part series of Identifying and Assessing Priorities - Needs, Wants, and Recurring Debt.)
Lenders calculate your debt-to-income ratio to determine how much mortgage you can afford. Even if you are a current homeowner and consider refinancing for a lower interest rate, DTI is looked at when determining if you qualify. What better feeling is there than to go in knowing that your debt-to-income ratio is strong? Of course, this is only one step in strengthening your financial health.
To view other articles by this author, please visit [http://www.savycents.com/]
or
Contact me at mcnuttgreen@aol.com
Article Source: http://EzineArticles.com/?expert=S._M._Green
Article Source: http://EzineArticles.com/8583402
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