Lenders look at one key piece of information when they determine how much money they are willing to give you for a loan – your debt to income ratio.
This ratio is crucial to being able to buy a car or purchase a new home, but not everyone knows what it actually means or how to calculate it, much less what it will mean when lenders take a look at your financial status.
If you are making a large purchase soon and you need to take out a loan, it is crucial that you learn how to calculate and manage your debt to income ratio. If you need help in doing so, keep on reading.
How To Calculate Your Debt To Income Ratio
Your debt to income ratio is all of your monthly payments divided by your monthly income. This resulting number is your debt to income ratio. While this may seem straightforward enough, a feasible debt to income ratio for you may not be suitable to a lender, so it’s important to know what they are looking for, as well.
What Debt To Income Ratio You Need
For lenders the ideal debt to income ratio of 43%; studies have proven time and again that once customers go about 43% of their monthly income going towards debts such as car payments, mortgages, and credit card payments, they are much more likely to run into financial trouble and miss a payment in the future.
How To Manage Your Debt To Income Ratio
It doesn’t really matter how many loans you can have at the same time, but instead the monthly payments and the amount you owe on those loans. However, the most essential piece of this puzzle is your monthly payments.
In order to improve your debt to income ratio, you have two options. You can either decrease your monthly payments or increase your monthly income. However, you will have to have income that you report, so passive side gigs may not help you in this regard (although they can!)
How To Decrease Your Monthly Debt
Making extra payments does not actually help your debt to income ratio, as lenders look at the monthly amount owed, not whether you have paid more on it or not (although extra payments do increase your credit score). Instead, you should focus on decreasing monthly payments.
In order to do this, you should focus on refinancing your home or car so that you can have lower monthly payments, this will give you more room for another monthly payment, which will increase the total loan that you are eligible for.
How To Increase Your Income
You can also increase your income, but you will need to do so in a reliable way. If you haven’t asked for a raise in a while – now is the time! As soon as you have a pay stub reflecting this raise, you will be eligible for a larger amount loan than you were before.