Gearing up for a loan application can stir up a mixture of emotions, from euphoria to anxiety about the entire process. All that is required for a plain sailing experience is knowledge on the subject and in particular, on the topic of debt-to-income (DTI) ratios. Many loan applicants will be unaware of the fact that this is considered by a lender before the applicant is accepted for a loan.
What is considered a good debt-to-income ratio?
Dividing your total gross income with your recurring monthly debt is the easiest way to understand what your DTI income ratio is. Once you are aware of this, you can take a step forward and arrange a meeting with a lender. By doing so, you can discuss your loan options and talk about whether your DTI is good or could do with some improvement.
The Negative Impact on Financing
Put it this way: if a lender looks at a borrower who has a DTI of 50% or above, you are instantly in the red. In many cases, they will not give you a second look since you will be deemed “dangerous” in their strict book of lending. This can make it a struggle to obtain financing. On a brighter note, there are multiple lending options out there now that consider applicants with a poor credit history and DTI.
Tips for Being Approved for a Loan
Fear not if you fall into the red category when it comes to calculating DTI because it does not mean that your chances of loan approval have gone completely out the window. In fact, the following tips could actually teach you how to handle your finances overall:
– Pay off any debts you have accrued.
– Reduce your DTI by paying in affordable amounts.
– If you are able, settle high-interest debts.
– Stop spending so much and start saving more.
– Write a monthly budget and stick to it.
– Cut off direct debits or subscriptions that you no longer require.
Improving the Debt-to-Income Ratio
Sit down and really get stuck into your finances. It will be worth it when you get one step closer to being accepted for a loan, despite having a low DTI at the beginning. Pay attention to the higher debts on your list, if possible. Paying off larger amounts faster will ensure that your credit rating boost at a quicker rate. This will also lift that credit rating arrow from the red spot to the amber or, if you really commit, close to the green.
There are plenty of ways in which you can improve your DTI, prior to applying for a loan. This will boost your chances of acceptance and will have a positive effect on your credit score as a whole. Take it upon yourself to perform a recalculation of your DTI every month, as this will paint a clearer picture of how your financial situation is changing, for the better!