Lenders need to ensure that the money they are lending comes back to them along with the agreed rate of interest. For this purpose, lenders rely on your monthly income, debt-to-income (DTI) ratio and your credit score.
DTI ratio is a major factor when applying for a credit. Your DTI ratio is the general basis for determining how much credit you can still get. If you do not have any credit against your name, DTI ratio becomes redundant. It means that your total income belongs to you only and you do not owe anything to the lenders.
Personal loans are basically unsecured loans. Lenders do not require any security from you in such cases. Therefore, it becomes significant for a lender to judge your repaying capacity. The DTI ratio is a good indicator of this. A high DTI ratio (say above sixty percent) means that you have already taken a lot of credit and your monthly income does not allow you any more credit.
It is important to know that how lenders calculate your DTI ratio. Find your average monthly income taking into account all the sources of your income. Divide this figure by the amount of debts you repay each month. The figure thus arrived at is expressed in terms of percentage. The lower the percentage, the better it is.
I just had a gentleman who wanted to purchase at about a 160 to 170 thousand dollar range. His credit wasn't great but it wasn't terrible so it was a little difficult trying to find the right loan program to fit his needs. He also wasn't aware of his DTI ratio. He only made about three thousand dollars a month and had about 1000 dollars a month in debt. Now if you calculate a house payment on top of that (the best one I could find for his situation was around 1200 dollars), that leaves about 800 dollars left over after liabilities and housing payments. His DTI ratio was over 50 percent and that was something that was killing him in the long run.
But like I said in my info, I'm not just a loan officer I'm a financial planner. I set him on to a path of consolidating his debts into a lower monthly payment, and hopefully I can help him out on purchasing a home!
Hope this helps!!
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