Finance

Is It Possible? Reducing Your Debt to Income Ratio

Posted: Mar 29, 2017 at 1:00 am   /   by   /   comments (0)

A pen over a stack of money Your debt to income ratio (DTI) determines how much of your gross monthly income goes toward repaying your debts every month. The lower this ratio is, the better since it indicates that you’re not spending a huge chunk of your income to pay off your debts.

This is good news if you’re planning on applying for a home loan since lenders prefer borrowers with a low DTI ratio, preferably not higher than 36%. If this ratio is on the higher side, however, it means that you’re spending a sizeable amount of your income on repaying your debts, which doesn’t leave you enough money for savings or for your other bills.

In general, you could lower your DTI in two ways — increasing your income and repaying your debts.

Increasing Income

To increase your income, you could work overtime, ask for an increase in your salary, get a part-time job, generate some cash from your hobby, or start a small business. You can reduce your DTI ratio if you could increase your income every month, without increasing your monthly debt payments simultaneously.

Repaying Debts

You could likewise focus on repaying your debts. Take note that while you’re repaying your debts, you also increase your DTI. This is only temporarily, though, as you would be using a significant amount of your income on your monthly debt payments. Mortgage loan brokers in Ogden explain that this is due to you, putting more of your income towards repayments.

For instance, if you earn $1,000 a month and spend $460 on paying off debts every month, then you would have a DTI ratio of 46%. If you put $700 on repaying your debts every month, then your DTI would be around 70%. Once you’ve managed to repay all your debts, however, you would have a DTI ratio of 0% since you won’t have to spend your income or debt repayments.

Figure out your financial situation, especially if you want to apply for a mortgage. If you’re near the 36% threshold, you have to act now to lower your debt. Choose the most workable option for your circumstances and get started.