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Increasing Your Debt to Income Ratio
The term "debt to income ratio" can sound a bit confusing but it's just your monthly income compared to the amount of bills you have. The amount left over is divided by your income to make a ratio, or percentage that the banks use. If you have $500 left over that's your borrowing power per month and then you can divide it by your income to get your debt to income ratio.
Simply take your gross income (the amount before taxes) and divide it by 12 to get your monthly gross income. Then add up all of your monthly loans such as a car loan, student loan, mortgage loan, credit card loan, personal loan or home equity loan. Do not subtract monthly house bills, car insurance or the taxes in your pay check. After subtracting all loans divide the left over amount by the gross income to get your percentage (or ratio). Mortgage lenders aren't giving loans out for anyone over 40% debt to income ratio right now because of this tough 2011 economy.
Now that you know what your debt ratio is how do you go about increasing it? In simple terms, increasing your income would make the percentage higher and so wouldn't paying off one of your monthly loans. A tricky way to do it would be to refinance your car loan over five years again for a lower monthly payment. You can use my free mortgage calculator to see the difference in your monthly payment. If you're very close and the bank says you're not quite there then there are other options to look at.
When the bank calculates your debt ratio they will be including the new monthly mortgage payment and taxes for the home that you're looking at buying. So if the taxes are $300 per month then you could look at the same value home and find one that has $200 taxes instead which will save you $100 per month and increase your debt to income ratio. You could also search around for the mortgage lender with the lowest interest rate in order to save some money per month. Use the mortgage calculator to see how much your interest rate would need to lower in order to get below a 40% debt to income ratio.
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