Understanding Your Debt-to-Income Ratio

Keeping an eye on your finances is always important, and one of the ways to do so is by making your debt-to-income ratio is in check. Your debt-to-income ratio is basically how much debt you have in comparison to your income. You want to keep your debt level as low as possible so that you appear to be a good financial candidate, especially if you are in the process of trying to find a loan to buy a home.

Even if you are not in the market for a home loan, keeping your finances in order is still something you want to make a priority. Many don’t consider their debt-to-income ratio unless it gets out of control. If you find yourself falling short on payments or just barely making minimum payments, your debt-to-income ratio may be falling into unstable territory.

Anyone can find out what their debt-to-income ratio is by taking their total debt and dividing that by their income. You want your debt to be a minimal portion of your income, because that shows you are financially healthy and able to manage your money. It also means that if you were to have a decrease in income for some reason, you would have a better chance to recover since your debt wouldn’t be overwhelming in comparison to your income.

Why Your Debt To Income Ratio Matters

If you are thinking about purchasing a home or possibly buying a new car, you want to evaluate your own debt-to-income ratio as you could save money on high interest rates and improve your chances at approval. Most lenders want you to keep your debt-to-income ratio around 30%, although that doesn’t mean you won’t get approved if it’s higher. Most lenders set their maximum debt-to-income ratio to around 40-50%.

If you are concerned about your debt-to-income ratio, you do have options to lower it to an acceptable level, especially if you are seeking out a loan. One way to lower your debt-to-income ratio is to simply start lowering your debt. You can do this by making larger or more frequent payments toward your debts. Always try to get the higher interest cards and loans paid off as quickly as possible. The more money that can be applied to high interest loans, the more you will save and the quicker you can begin to pay off remaining debts.

You can also try to improve your debt-to-income ratio by increasing your income. This may mean working overtime if it is available to you or picking up part time work on the weekends. Increasing your income has the benefit of not only showing your lender a higher level of income, but it will also allow you to pay down your debts even faster.

Find Us Today!

If you are struggling with your debt-to-income ratio, or just have questions about how debt-to-income ratio works, please contact Family First mortgage in Lafayette, LA so we can help you find the answers you are seeking.