What Is Debt to Income Ratio When Applying For a Home Loan

What Is Debt to Income Ratio?

By definition, the debt to income ratio is a term used by lenders to determine a loan’s serviceability. Basically, as its name implies, the ratio is used to identify how much of the borrower’s monthly income is applied towards the payment of any ongoing debts, such as mortgage repayments, credit card payments, car loans, and so on.

If we were to take a look at debt to income ratio as an equation, it would be monthly total debts divided by monthly income.

Naturally, the lenders use this ratio when assessing your loan application. In short, the debt to income ratio is one of the things taken into consideration when you apply for a loan.

The Basics

For example, if you have a monthly income of $2000 and you make repayments of $500 each month, then your debt to income ratio is of 25%. Keep in mind that, when trying to get your loan approved, lenders will not want this ratio to go above 30% or 35%.

This is because a high ratio means that you are spending too much of your monthly income on your debts and that you won’t have any income left for your everyday life or living expenses if you were to take another loan.

A high debt to income ratio can have the following results:

1. You will struggle with the paying of any emergency expenses that may come up.

2. Banks will consider you at a higher risk of default and will most likely reject your loan application.

3. Too many rejected car or home loan applications will make your credit report look bad.

Reducing the Debt to Income Ratio

Naturally, if you want to reduce your debt to income ratio, you can do two things – either reduce debts or increase income. On top of that, you will have to monitor living expenses.

Let’s say that you find ways to decrease debt or even to increase income – this doesn’t mean that your home loan application is sure to get approved. High living expenses may also be the ones to break your loan application.

The Bottom Line

Therefore, the debt to income ratio is only a part of a home loan. For example, if you have a low ratio but high living expenses, then it may be difficult to make repayments – that if your loan gets approved.

There are various ways through which you can achieve a proper debt to income ratio. We can offer you all the information you need about loans and such – in fact, we can even help you get the best loan for your needs.

We are more than happy to help you – just reach out and contact us today! Contact us on on 02 8530 1107 or submit your scenario online.


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