Debt-to income ratio is a financial indicator that helps lenders to ascertain your credibility. Depending on the debt income ratio, a lender decides whether you should be given loan or not. It also evaluates the amount of debt that can be handled by you. Lenders fear losing their money. They have become exceedingly cautious and are approving loans only if consumers are financially responsible. This is where the role of debt income comes into play. In addition to your debt-to income ratio or DTI, credit score is another number that represents your financial responsibility.
Lenders have played a very instrumental role in igniting the subprime mortgage crisis. They approved mortgage loans to borrowers who didn’t qualify for one. This was done by manipulating income of borrowers, furnishing forged documents of property appraisals to help borrowers qualify for a mortgage. The credit crunch or recession is the outcome of the same. It is an aftermath of irresponsible lending that has devastated the American economy.
Debt-to income ratio has 2 ratios- the front ratio and the back ratio. The front ratio indicates your housing costs. It basically takes into consideration the PITI, the principal, interest rate, insurance as well as taxes.
The back ratio indicates the payments you make for your other debts. This includes credit cards, child support, alimony, student loans etc. It also includes the expenses that are mentioned in the front ratio. A debt-to income ratio of 28/36 is considered a standard. The FHA or Federal Housing Administration allows a debt income ratio of 29/41 to qualify for a loan.
Maintaining a debt income ratio allows you to enjoy several financial benefits that the lenders offer. The same is with your credit score. If you have a good credit score and a good debt-to income ratio, you are a lender’s favorite.