Importance of calculating your debt to income ratio
Importance of calculating your debt to income ratio
If you need to take out a loan, your lender will look into several factors like your credit score, income as well as your debt-income ratio (DTI). This helps your creditor realize whether you have the ability to repay them back.
Debt income ratio signifies the amount of debt you owe to your creditors compared to the income you earn. Calculating your debt to income ratio is important because there are various loan lenders who may look into your debt to income ratio before they grant you a loan. Your eligibility for a mortgage is also dependant on your credit history, income as well as your debt income ratio. Thus, calculating your debt to income ratio is important. This article provides you with information you need to know about the importance of calculating your debt to income ratio and how you can calculate it.
Importance of debt to income ratio
Your financial condition indicates your social status and also your future security. The main factors that affect your financial condition are the fiscal value and amount of your debts weighed against your income. However, it is desirable to have more income and fewer debts. Thus, calculating your debt to income ratio is important. DTI helps you gather this basic understanding and evaluate the numeric difference between your income and debt. This in turn will help you analyze your financial strength. This kind of understanding will also help you determine your financial standing and what you need to do in order to improve your cash flow or savings.
Calculating a person's debt to income ratio is essential as it represents your cash flow. It indicates the portion of your monthly gross earning that goes towards paying off your fixed expenditures like your debts, fees, taxes and your insurance premiums. Your debt to income ratio is also the major indicator that provides an idea to the creditors to determine whether you will have sufficient cash flow to fulfill your financial obligations every month. However, the lower are your debt to income ratio, the more are your cash flow and therefore, more are your possibility to repay your loans. It also enables your lenders to assess your creditworthiness.
How to calculate your debt-to-income ratio
Here are some steps that will help you calculate your debt to income ratio.
List your income - Gather all the details of your income and add up all your earnings. Your monthly income, overtime, commissions or bonuses that comes in a regular basis. In case your monthly income varies each month, assess the monthly average for the last two years.
List your debts - Figure out the total amount you owe. List all your debts such as your credit card debts, all your loans as well as your mortgage payments.
Calculate - After listing your debt amount as well as your income, divide your total debts by your total monthly income. The figure that you get is your debt-to-income ratio.
Thus, calculating your debt-to-income ratio is essential. However, if you find your debt to income ratio is 0.36 make sure you take up some action to lower it. In case your debt to income ratio comes out to be higher than 36, it may result in higher interest rate or down payment on the loan you may apply for.
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