What is the debt-to-income ratio

Good personal finance management requires you to learn some basic concepts to understand the factors that allow you to borrow. So it is with the debt-to-income ratio (DTI), an almost mandatory requirement to obtain a mortgage. If you still do not know what it is about, we will tell you.

Article content

1. What does the debt-to-income ratio represent?
2. What is DTI for?
3. Does the debt-to-income ratio affect your score?
4. Comparison between debt-to-income and debt-to-limit ratios
5. Evaluation of the DTI by banks and lenders
6. Solvency according to the level of debt-income

What does the debt-to-income ratio represent?

Known as debt-to-income ratio In the United States, it consists of a metric that tells you the percentage of debt that you are paying monthly with respect to your gross income (before taxes).

That is, when you add up the credit payments you make in 30 days and compare them with what you earn, you get the DTI.

It is important to understand that the debt-to-income ratio only considers the minimum payment for the following categories: mortgage, auto credit, student loan, credit cards, personal loans, and other debts reported to the bureaus. You can find out this by checking your credit report.

Let's suppose for a moment that you have to pay about $ 500 a month to pay for different items (cards, loans, mortgage, etc.) and you earn $ 2,000.

The formula to do this calculation It's very simple: you just have to divide both figures (debt ÷ income) and then multiply by 100. In this example, your ratio would be 25%.

What is DTI for?

When it comes to smart personal finance management, you shouldn't overlook this fact. The reason: this percentage tells you the balance shown by your financial habits.

When you have one High DTI, it means that you are investing more in debt, leaving you less capital at the end of the month. On the contrary, a Low DTI implies that you are managing your money better.

This is important because it has been shown that people with a debt-to-income ratio above 45% they have trouble meeting their commitments.

This risky behavior is frowned upon by banks and lenders, who prefer to grant financing to those who show a low or average income-debt ratio.

Does the debt-to-income ratio affect your score?

The truth is that not. Many people are under the impression that this data could negatively affect their score, something that is not true.

This is explained taking into account that there are consumers who earn a lot of money and have a mediocre score, while there are others who earn very little and have a poor score. score almost perfect.

The credit score is based solely on your records related to credit instruments and the history of how you have handled debt.

The DTI can indirectly influence your score because it leaves you less liquid each month, reducing your ability to pay for other financial commitments.

Comparison between debt-to-income Y debt-to-limit ratios

When it comes to differentiating financial terms, we invite you to be clear about what each of these elements is.

We have already seen what DTI is about, so we must define the debt-limit ratio, also called the credit use ratio and it refers to the percentage of credit you are using with respect to the total financing you have available.

It is a metric that estimates the debt balances that you present each month in relation to the full amount of credit you have at this time. In other words, it serves to find out if you are pushing credit cards to the limit.

Evaluation of the DTI by banks and lenders

When you intend to apply for a personal loan, a credit card or a mortgage, financial entities and companies will want to know your debt-to-income ratio.

This is because they want to reduce their risks when offering money, which is why they could demand a debt-to-income ratio of less than 45%, which is an industry standard.

It is advisable in this case to have a DTI below 36%, which usually facilitates approval for larger financing. However, if you can be below 30%, that represents an ideal condition.

Remember that each lender has their own requirements on this data and it is not the only thing they evaluate.

Solvency according to the level of debt-income

Solvency (creditworthy) is undoubtedly one of the most relevant factors in obtaining additional capital. That's why we give you 3 examples of what your debt-to-income ratio:

• Having a DTI of 50% or more means you have little money to spend or save. This limits your loan options and complicates your situation in the face of an unexpected event.
• When you are between 36 and 49%, you are in a manageable zone that can be improved. You may be asked for other requirements to increase your eligibility.
• If you are below 35% you can manage your debts well and you have money left over for other expenses, being an almost pre-approved candidate.

The debt-to-income ratio signals trends in managing your personal finances. If you want to get more credit and make ends meet with money, at Blog Hispano de Negocios we help you achieve your goals.