Debt ratio is a measurement of risk that every lender will look into before giving you a mortgage loan to ascertain if you will be able to pay them back in a consistent and timely manner. Debt ratio is a statistical measure of the total amount of money you owe to creditors, bill collectors and agencies divided by the amount of money you bring in on a monthly basis.
Lenders make decisions based on either of the types of debt ratios. The first is calculated based on your mortgage expenses compared to your monthly income while the other is calculated on your total monthly expenses compared to your total income. Your debt ratio informs both the lenders and bank on your ability to meet the expense of payments and the percentage of your total income to be used for your mortgage expenses. Different ranges of ratios are used under different loan modification programs to determine your eligibility for loan modification.
A high debt ratio is evident of financial hardship and increases your risk of default. If your total expenses and debts exceed 52 % of your monthly income, then your debt ratio is on a high side. The debt to income ratio is designed to prevent homeowners from exceeding their limits and not getting involved in sticky credit situation by overspending. Most lenders will tolerate a debt ratio of approximately 28 % for your housing expenses and 36 % for your total recurring debt obligation.
Having a reasonable debt ratio does not necessarily mean that you will qualify for a mortgage loan. It is best that you figure out what your debt-to-income ratio is, using the method that lenders do. For you to determine the amount of money you can afford each month as payment, the use of a mortgage calculator will become handy for you. Don’t attempt to buy a home without checking out this debt ratio thing first.
