Effect Of Debt To Income Ratio To Your Credit Score

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Effect Of Debt To Income Ratio To Your Credit Score 

    One important parameter used by many lenders while calculating the loan eligibility of a borrower is the debt-to-income ratio or DTI. This term can be simply explained as the percentage of a person’s gross monthly income that goes towards repayment of debts and other obligations such as taxes, fees and insurance premiums.

 

     A DTI is the most convenient means of judging a borrower’s repayment potentiality since this makes the lender identify the percentage of income available with the borrower for a mortgage payment.

     There are two ways of calculating a DTI, and include the front ratio and the back ratio methods. In a front ratio, lenders calculate the percentage of monthly income that goes towards essential expenses of life such as housing costs. For a person living on rent, the housing cost is the rental value and for a homeowner, the housing cost involves property taxes, mortgage principal and interest, mortgage insurance premiums, hazard insurance premiums and other fees. In a back ratio, lenders calculate the percentage of income that goes towards payment of all existing debts including credit card payment, car loans, student loans, child support payments, alimony payments and legal judgments.

      A borrower has a better chance to qualify for a mortgage loan if the value of debts is lower than the gross monthly income. Different types of loans have different eligibility criteria with respect to DTI. In case of conventional mortgage loans, the DTI should be 28/36. Here, the first number is the front ratio while the second number is the back ratio. Similarly, for VA loans, the DTI limit is 41/41. In case of FHA loans, the eligible DTI ratio is 29/41. This suggests that a borrower can spend 29 percent of his income for essential expenses and 41 percent for meeting recurring debts. The remaining can be used for mortgage payment.

       Better the debt-to-income ratio of the borrower, more are the chances of getting a higher credit score and loan amount.

Effect Of Debt To Income Ratio To Your Credit Score

 

 

 

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