Debt-to-Income Ratio (DTI)
Candlefocus EditorThe higher the DTI, the more risky it is to lend to a consumer. Most lenders require a debt-to-income ratio of 36 percent or less before they will extend credit. A higher ratio means the borrower is in a more precarious financial position and the lender is more likely to default on the loan.
A borrower’s debt-to-income ratio can be improved by minimizing their debt or increasing their income. Making a larger down payment on a loan can also reduce the DTI ratio and make the borrower a more attractive loan candidate. Consumers can also get rid of expensive or unnecessary debts to make them more attractive to lenders.
There are some loan programs, such as FHA loans, which allow borrowers with higher debt-to-income ratios to qualify. However, these loans typically come with higher interest rates and additional fees.
The debt-to-income ratio is just the starting point for lenders when considering whether to approve or deny a loan application. Other factors, such as credit score and history, income stability, and other financial liabilities play a role as well. Ultimately, lenders determine loan approval based on the overall financial picture of the borrower.
Just because a consumer has a high debt-to-income ratio doesn’t automatically mean they won’t get approved for a loan. It’s important to look at the entire picture. To help improve the odds of being approved, consumers can improve their credit score, provide a substantial down payment, and reduce their overall debt load. Paying off expensive debts like credit cards, student loans and medical debt can help improve a consumer’s debt-to-income ratio.
In summary, debt-to-income ratio is an important indicator for loan approvals. Lenders use this ratio to determine a borrower’s ability to service their debt and typically require a ratio of 36% or less. Consumers can improve their debt-to-income ratio by paying off expensive debts, increasing their income and making a larger down payment. Although a higher DTI ratio can make it harder to get approved for a loan, it doesn’t necessarily mean it’s impossible. By improving the other aspects of their financial picture, consumers can make themselves an attractive option for lenders.