If you have ever applied for a loan before one acronym you might have seen or heard – DTI. It’s pretty important and it stands for Debt to Income.
Your DTI is expressed as a ratio and is always something lenders look at when you apply for a loan. DTI with your credit score, and a few other factors, can help determine what kind of offer you receive.
It is said that a ratio of 20% or lower is considered excellent. This means that you have 80% of your monthly income left to work with after all your debts are paid each month. Higher ratios indicate that your money is already tagged for other monthly expenses. A ratio of 40% or higher and you’re going to find yourself having trouble getting larger loans such as a mortgage.
It makes sense doesn’t it? It’s riskier to lend to someone who already has most of their money wrapped up with other bills.
How can you find out what your DTI is?
First, take all the debt you pay each month, including monthly rent, mortgage payments, student loans, credit cards, medical bills, childcare and any other revolving expense. Add all those expenses together and then divide that total by your gross monthly income (that’s your monthly income before taxes). The resulting number from this simple equation is your DTI ratio.
So, let’s say you pay $1,000 in rent, $300 in student loans and $250 on a car loan every month; that’s $1,550 in debt payments. You make $60K a year, so $5,000 a month. That puts your DTI at 31%, which isn’t necessarily bad, but getting it into the 20s would be even better if you want more competitive loan offers.
How can you lower your DTI?
1. Increase the amount you pay monthly towards your debt. Extra payments can help lower your overall debt more quickly.
2. Avoid taking on more debt. Reduce the amount you charge on your credit cards and postpone applying for new loans.
3. Postpone larger purchases until you can have more money to apply towards a down payment. By doing this you will have to fund less of the purchase and will help keep your DTI down.
4. Monitor your progress. Watching your DTI lower is a powerful motivator to keep going. Calculate it out every month to see how you’re doing.
Having a lower DTI will help you when you are looking for the best car loans. It will also give you a boost in your credit score and make that car financing process easy.