A Look at the Debt to Income Ratio

Your debt to income ratio is a major factor when determining your credit score. In fact, lenders look at this special ration when determining if they will provide you with a loan. This is because the ratio helps them decide how likely you will be to pay off your loans in full and on time.

To figure out your debt to income ratio, all you need to do is determine your monthly income and your monthly expenses, minus your house payment. The lower your ratio, the less of a risk you are to lenders. In fact, most experts agree that you should keep you debt to income ration to below 20%. Otherwise, you put yourself at risk for drowning in debt. In addition, it will make it more difficult for you to get a loan and, if you do, the interest rate will be quite high.

Ideally, your debt to income ratio should be between 10-20%. You can use this ratio to also help you determine how much you can afford to pay if you are looking to purchase a home. To do this, simply multiply your monthly income by 36%. This amount, minus your current monthly bills, is the amount you can afford to pay toward your new home.

Your total debt to income ratio, including your house payment, should be kept between 36-41%. If your ratio stays in this range, you should be able to live comfortably while still paying all of your bills on time.