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    The Debt-To-Income Ratio: What It Is & Why It Counts

    Prices for consumer goods and property are ever-increasing. This poses a challenge for the majority of 

    Americans since real wages have barely budged over the last decade, something which has resulted in a sharp increase in consumer debt among individuals.

    While many debt management solutions exist, homeowners have a unique set of options available for refinancing their debt.

    Here we will look at how homeowners can use the equity in their home to get their debt under control.

    The Debt-To-Income Ratio: What It Is & Why It Counts 

    The debt-to-income ratio (DTI) is an important component of one’s credit score. Both lenders and credit bureaus will look closely at this metric when determining a borrower’s creditworthiness.

    Those with a high DTI are less likely to qualify for loans than those with a low ratio. Keeping this ratio low is important for those who are concerned with maintaining a good credit score. 

    What Is The Debt-To-Income Ratio?

    DTI looks at how much of one’s monthly income goes towards servicing their debt. This measurement helps inform lenders whether an applicant is able to take on more debt. If their debt-to-income ratio is very high, it means they’ll likely have trouble making their payments, since much of their monthly income is already being devoted to making bill payments.

    Most lenders like to see a ratio of 35% or less when looking to approve loans. Higher ratios may be a prohibitive factor for many individuals seeking to take on more debt. 

    How Is Debt-To-Income Calculated

    Calculating one’s debt-to-income isn’t difficult and can be done by taking the totality of one’s monthly payment obligations - mortgage/rent, minimum monthly credit card/line of credit payments, alimony, car payment, and more - and dividing it by gross monthly income. 

    Example 1: Jeff earns $3000 per month and has monthly payment obligations of $2200. To calculate his ratio, divide 2200/3000 and multiply by 100. This results in a 73% DTI ratio, which is very high. 

    Example 2: Sherry earns $4000 per month and must pay at least $1200 a month for rent, her car, and her minimum credit card payments. This means her DTI is 30%, which is within the range that lenders prefer.

    Why Does DTI Matter? 

    • Impacts Credit Score: At least 30% of a person's credit score is determined by this ratio. Credit Bureaus have determined this to be an important metric because it gives insight into how responsible an individual is with their debt. Those who take on more debt than they can realistically manage are unlikely to present high creditworthiness.
    • Limits Access To New Credit: A high ratio can limit an individual's ability to open new lines of credit. High levels of debt relative to income is one of the most common reasons why applicants are denied, even if other aspects of their credit report are positive.
    • Limits Access To Debt Consolidation: People who have a hard time managing their unsecured debt often look to consolidate their debt into a single monthly payment. A high ratio may make it difficult to access these kinds of refinancing vehicles. 

    How To Lower Your Debt-To-Income Ratio 

    Being rejected for a loan can be stressful, especially if the loan is needed for something important like debt consolidation. In this case, the best option is to increase one’s credit score, and one of the best ways to do this is by decreasing their ratio.

    • Aggressively Pay Down High-Interest Debt: The best way to increase DTI is by paying down debt and making sure to not add to any current accounts.
    • Increase Income: Another method of reducing the ratio is by increasing monthly income. This can be done by taking on a part-time job or asking your employer for a raise.

    Lenders Who Work With High DTI Borrowers To Consolidate Debts 

    • Com: This lender offers loans of between $500 - $10,000 to individuals who have a high ratio. While they do offer competitive rates for those who qualify, 5.99% on the low end, loans can come with interest rates as high as 35.99%.
    • com: PersonalLoans is another lender who’s willing to work with borrowers who have a high debt-to-income ratio. Just like CashUsa.com, rates can range from 5.99% to 35.99%, but can offer amounts of up to $35,000. 

    Unlike most lenders, PersonalLoans.com can facilitate loans in all 50 states. The application process is quick and funds can be available to those who qualify in as little as one business day. 

    • Bad Credit Loans: This lender is important to mention because they are willing to work with people who have both a high DTI and a poor credit score. Their rates are similar to the two previously mentioned lenders but usually will only lend out a maximum of $5000. 

    Conclusion 

    The debt-to-income ratio is an important part of determining one’s credit score. Moreover, those with a high ratio will find accessing new credit to be difficult, and when they can, the rates are generally less attractive. Maintaining a DTI of at 36% or less will greatly improve one’s odds of being approved for a loan