Having trouble getting approved for a loan? This can be very frustrating especially when that loan is not a want, but an actual need. The worst part is receiving a rejection notice without a reason as to why you aren’t getting approved.
So if you’re making the income and your credit score is great, why aren’t you getting approved? There could be a very simple reason and it’s called Debt to Income Ratio aka DTI. If you aren’t familiar with the debt to income ratio here’s what you need to know:
What is DTI & Why Does it Matter?
The debt to income ratio is a measure of finance that compares a person’s debt amount to their overall income. Lenders use this as a way to measure a person’s ability to repay debts and manage monthly payments. Calculating DTI is very simple, just take the total debt payments per month and divide them by the total monthly income to receive a percentage amount. That percentage is the DTI ratio, see below:
$2,000 (debt) / $6,000 (income) = 33% (DTI)
Debt to income ratio matters because the lower a person’s debt to income ratio, the lower the perceived risk they are to a potential lender. When you go to make those big purchases, DTI is taken into consideration alongside your credit. Here’s a few examples of big purchases where DTI becomes a factor.Housing
In order to qualify for a mortgage, lenders will want to see how responsible a borrower is with their financials. Looking at DTI, the average lender won’t want a borrower to exceed 35-41%, however since every situation is different it’s recommended to speak with your lender.Auto
Lenders will take debt to income into consideration when borrowers want to finance a vehicle. It’s important to be aware of your DTI as this will help when knowing how much a lender is willing to approve. To make this even easier, it’s recommended to get preapproved by a lender.Business
Looking to start a business or even want to expand? Since this type of loan isn’t considered a “necessity”, lenders are going to be more concerned about who they are lending to. They are only going to be willing to lend to someone who is less “risky” which is why it’s important to be on top of DTI.
What Are Things That Could Affect my DTI?
There’s a variety of things that could affect your debt to income ratio. If you’re concerned about your DTI being too high, here are things you might want to look out for.Outstanding Debt
One of the leading causes of debt in America is unpaid medical bills. It’s important to know if you have any unpaid expenses out there, especially medical. An easy way to check if you have any unpaid debts floating around are with free online tools such as CreditKarma. This tool allows you to check your credit score and download a free credit report all in the same place.Student Loan Balances
Student loan balances are an ever growing problem and one that many lenders are starting to acknowledge. This type of debt is something that can be discussed with lenders as some may not hold as much importance to it as others. For example if a borrower has very high student loan debt, some lenders may take a percentage of it and use that when calculating DTI ratio.
You can’t live with them and you can’t live without them. The paycheck-to-paycheck world is not an easy one to live in and it sometimes causes people to have to rely on credit cards in order to get by. It’s recommended you not go over utilization threshold of 30% in a billing cycle.
Keeping debt-to-income low will help to ensure the repayment of debts and give not only yourself piece of mind when it comes to handling finances responsibly, but also potential lenders. Working towards a lower DTI can also help you become more likely to be approved for those big purchases.