Applying for a Home Loan? Keep your Debt to Income Ratio Afloat
Any bank or lender would conduct thorough background checks on their prospective borrowers to determine their reliability. One primary mechanism they resort to in determining a prospective borrowers ability to repay the loan is through the debt to income ratio.
So What is this Debt-to-Income Ratio?
A debt-to-income ratio is the ratio of the sum of your debt (credit cards, loans, and other EMIs) and even your everyday expenses to your gross monthly income. This is the debt-to-income (DTI) ratio definition at its most basic. The lower the DTI, the better your chances of getting a Home Loan.
What is a Good DTI Ratio for a Home Loan?
It’s important to remember that the ideal DTI ratios aren’t set in stone. They often vary and are subject to change. However, a good DTI ratio percentage is around 40%. This bare minimum comes with terms and conditions;
- Your affordability- Whether or not you can still manage to live off the remaining chunk of your income after all debts have been paid for.
- Consider a co-signatory- This reduces the overall DTI, and puts less burden over one individual.
- Ensure you pay every loan- If you have a handful of loans which have a stable EMI, ensure that they’re paid off in time. Failing to do so will reflect badly on your credit score.
The Two Kinds of DTI Ratio
When you apply for a mortgage, lenders look at two kinds of DTI ratios, both of which are explained below:
- Front-end Ratio- Also known as housing ratio, this shows the percentage of your income that you use towards housing expenses, including real estate taxes, insurance, and association fees.
- Back-end Ratio- This shows the percentage of your income needed for you to cover all your other monthly-debt obligations, including credit card bills, student loans, or any other debt that shows up on your statements.
As for how to calculate the debt-to-income ratio, leave that to the online calculators. Bajaj Finserv provides a user-friendly and accurate calculator to help with your debt consolidation.
Getting a Home Loan
The debt to income ratio in India falls within 36% to 40%, depending upon the guidelines followed by the lender. It’s also wise to note that a majority of the population fall between 45%-50%, which is dangerously high. Some financiers offer different rates for individuals falling under different categories. For example, Bajaj Finserv offers self-employed customers with a flexi scheme option on their Home Loan, which greatly reduces the burden of repayment. So, it all finally comes down to choosing a lender. However, the DTI ratio recommendation remains below 35% which can be achieved by managing your existing debts and expenses effectively. If in case you are looking for a quick Home Loan, NBFCs like Bajaj Finserv, offer Home Loans with attractive interest rates coupled with instant approval schemes.