Christian Debt Recovery

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June 7th, 2009 |

Author: Gavin

Debt-to-Income Ratio and How It Affects Your Borrowing

If you are looking to purchase a home, lease a new car or even applying for a credit card, your debt and your income are both determining factors on the type of loan you will qualify for. “Debt-to-Income” ratio, commonly referred to as your “DTI,” is an element which plays a primary role for any major purchase or financial transaction that you may embark upon. Your debt-to-income ratio is a personal finance benchmark that relates your monthly debt payments to your monthly gross income.

A good way to calculate your DTI is by dividing your monthly housing expenses by your monthly gross income. Front-end DTI for renters is simply the amount paid in rent, whereas for homeowners it is the sum of mortgage principal, interest, property taxes, and home insurance (i.e., your PITI) divided by gross monthly income.

A high DTI raises red flags with lenders because it is commonly associated with borrower delinquency. One of the main factors to look at when analyzing why you have a high DTI is the amount of debt you have, the next step is to reduce the ratio as quickly and efficiently as possible, whether it means to lower your debt or increase your income, the effect is an immediate improvement of your credit score.

The most optimal way to reduce the ratio between your debt and income is to pay off your debts and increase your income. However, because the reality is that doing either isn’t easy and most consumers don’t know where to begin, looking into a debt relief program or debt settlement program can expedite the time it would take to alleviate your debt.

Debt settlement programs can help by consolidating all unsecured debts including credit cards, personal loans, medical bills, collections and other accounts into one giving you a single monthly payment which is usually two to three times lower than now. Also, in debt settlement, professional debt arbitrators negotiate with your creditors to lower your total principal balances, eliminate interest rates, and achieve an account status as “paid as agreed” which in turn means that your balance is at zero and your credit score begins to return to good standing.
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To learn more about
Debt Relief
programs and how they can help you, you can visit
Debt Free
Counselor’s page.

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