By financen | October 5, 2010 - 3:31 pm - Posted in Debt, Debt to Income Ratio

One of the important criteria in order to get approved for a mortgage loan is to have a low debt to income ratio (DTI) other than having good credit scores. When a bank is reviewing your loan application, they will look into three main areas while reviewing your credit history. First, they will check your credit scores. This is the most important factor in getting approved for a home loan. They will also look into your current income and your job history.

If someone who is just 19 years old is applying for a home loan with a credit score of 800, he will not get approved just because of his good credit scores. The banks will look at the debt to income ratio and job stability just as much as the credit scores.

Debt to income ratio is simply the ratio between a person’s earning and how much they pay monthly in installments and revolving debt. For example, if a person earns $4000 in a month and out of this, $2000 is spent in monthly expenses like rent, car payments, credit card payments, then his debt to income ratio is 50%.

Banks will prefer approving the loan applications of those people whose debt to income ratio is as low as possible. This way, they will feel assured that the borrower is going to make his mortgage payments without any default. If his debt to income ratio is high, then there are greater chances of his defaulting on the payments.

A large number of people have a revolving debt account. This account is like a credit card and it has no end point to the debt. It’s an open ended line of credit. The debts can be fluctuating. They can be very high on a certain month and very low on the other month. They keep on revolving every month.

Installments debts have a predetermined time line. Certain kinds of debts like car payments, home loans, student loans fall under this category. These kinds of debts can be “re-charged” or increased once the terms have been set by the lender. The loan amount keeps on decreasing on an installment basis.

So when calculating one’s debt ratio (DTI or Debt Ratio) banks typically won’t allow you to pay down revolving debt in order to qualify. This is because one can easily re-charge the revolving account back up after the new loan is issue. However, the banks will allow you to pay off installment debt since it has a specific time period and cannot be recharged.

Debt to income ratio will also get affected by student loans. If you have applied for a deferment on your student loan, it will lower the debt to income ratio. This is a debt in any case, even though it can be paid later at lower interest rates.

Now you can see there’s more to getting approved for a mortgage loan than just having good credit scores. Other than having good credit scores, one of the biggest criteria is having a low debt ratio (DTI).

This entry was posted on Tuesday, October 5th, 2010 at 3:31 pm and is filed under Debt, Debt to Income Ratio. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.

1 Comment

  1. December 7, 2010 @ 4:39 am

    I love the debt snowball approach, particularly the way Ramsey suggests going through it. If you happen to be speaking to the masses like Dave, one thing everyone falls short of is certainly inspiration. The majority of people need to be inspired to keep going, therefore start with the smallest credit card debt and pay it back first.

    Posted by Lvnv Funding