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Debt To Income Ratio Percentage
When applying for a mortgage, you want to make your finances look as good as possible. One way to improve your financial image is to lower your debt-to-income ratio. It’s simply the percentage of your gross monthly income that goes toward paying your debts. There are two types. The front ratio includes all mortgage debt and housing costs. The second type is called back ratio and includes all non-mortgage debt.
You can use an online debt-to-income ratio calculator to determine your percentages before you go to the bank. First, you have to gather all of your financial information. Determine how much you make monthly and who you’re indebted to and for how much. Be sure to include all of your obligations such as mortgage payments, insurance and taxes, car payments-including taxes and insurance, credit card payments, student loans, alimony or child support. To obtain your front or back percentage, simply divide your payments by your total income. The goal is to get the number as low as possible. Ideally, lenders look for a front ratio of no more than 36% and a back ratio of 28% or less. If your percentage is low before going in for a loan that indicates that you aren’t using all of your available income to pay debts. A low percentage demonstrates that you’ve been a good steward of your money by not using credit to prop a lifestyle that you can’t maintain on your income alone.
Bottom line: Debt to income ratio is important to the bank. It’s one of the first things analyzed when you apply for a loan. It’s easy to calculate and easy to improve by paying off your debt or increasing your income. Lowering your percentage may also qualify you for a better interest rate.
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