If you’re in the market to take out a loan at an affordable rate, you must be aware of the two most important factors that are checked before giving you a loan. Yes, the numbers that are checked while giving you a loan are your credit score and your debt-to-income ratio, more popularly known as the DTI ratio. Are you aware of what a DTI ratio is and why it holds so much importance during a financial transaction? Read on to know more on this particular topic.
How is your DTI ratio calculated?
As the name suggests, your DTI ratio is nothing but the ratio of monthly income that you make in a month and the debt obligations that you’re supposed to pay in a particular month. The amount of debt will include mortgage debt, car loan debt, student loan debt, credit card debt and any form of other debt that you’re liable to repay. In order to calculate your DTI ratio, you have to add up all your monthly debt obligations and then divide it by the gross monthly income that you make in a month.
When is your DTI ratio checked?
Just as your lenders check your credit score before lending you a loan, they also check your DTI ratio that is your debt to income ratio. If you have a high debt-to-income ratio, this means that you have too many high interest debts in accordance with your monthly income. Therefore, this will imply that you’ll not be able to make the monthly loan payments on time as you may fall short of cash. This is the time when your lenders will charge you high interest rates on the loans. Thus, you must always calculate your DTI ratio before applying for a loan from a lender.
If you want to make sure that you grab the best loan in the market, you must work towards lowering your DTI ratio so that the lenders may be able to offer you a loan with an affordable interest rate. You can easily repay the loan without having to fall back on the other monthly obligations.
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