When a lender considers your home loan application, it must be assured that you have the capability to make regular repayments on the home loan you are opting for. In order to do so, the lender will scrutinize your financial health. One of the key parameters any lender uses to evaluate the state of your finances is the debt to income (DTI) ratio. To put it simply the debt to income ratio is the amount of debt you have as compared to your monthly income.
This is a ratio that helps the lender determine how much additional debt you can handle apart from the debt you are already servicing and what is the credit risk you will be exposed to as a result of the same. It is calculated by dividing your total monthly debt payments, including minimum credit card payments, auto loan and student loan payments and any other regular debt obligations by your income.Let us understand this better with the help of an example:
Firstly arrive at the sum total of your monthly debt repayments. It should include things like-
- Your car loan
- The payments you need to make on your credit card each month
- Student loan
- Personal loan
- Any other loan
Adding these will help you arrive at your total debt obligation. Next, you add up your monthly income. Your monthly income should include the other sources of income you have apart from net income. The components for the same should be:
- Your total take home salary
- A monthly estimate of the bonuses and commissions you earn.
- Your earnings from interest and dividend repayments from your investments.
To get your DTI ratio, you divide the sum of your monthly debt with your total income and multiply this by 100. Say your debt repayments amount to Rs 40,000 in a month and your monthly income is Rs 1,00,000, your debt to income ratio would be (40,000/1,00,000 x 100 = 40%)
If your debt to income ratio remains low, it indicates that you will be able to repay your EMIs with ease and on time. Lenders in India, prefer that the customers have a debt to income ratio of not more than 35%. Depending upon the profile of the customer they may stretch this limit to 40%, but such cases are rare.
In order to keep your debt to income ratio under control, you must do the following:
Make timely repayments- Whether it is your car loan, your credit card repayments or a personal loan you have taken, make sure you make every repayment in time so that you do not get into a debt trap. But firstly, be debt responsible and do not take on debt beyond your means.
Consider the possibility of keeping the loan burden on one person- Ideally, if both spouses are working, one person should be servicing all the other debt while the other is kept free to take on the home loan. This will keep your combined debt to income ratio low. If you are unmarried and facing a problem in getting a loan because your DTI ratio is too high, consider co-signing with a working parent.
The DTI ratio is an important parameter that any lender uses to assess your repayment capabilities. It is wise to keep a check over this ratio yourself and try to maintain it at under 30% to enhance your chances of getting a home loan when you need one. A low DTI shows you have a good balance between debt and income.