Understanding Debt-to-Income Ratio

Are you in the market to purchase a home or car and wonder why your estimated payments seem to be high? Are you buckling down and just want to get a tighter hold on your financial situation? One of the most important ways you can get an idea of your financial outlook is to take a closer look at your debt-to-income ratio.

Your debt-to-income ratio is basically how much debt you have in comparison to your potential income. You want to keep your debt level as low as possible so that you appear to be a good financial candidate, especially if you are in the process of trying to find secure any sort of loan from a lender.

Even if you are not in the process of trying to secure a loan, keeping your finances in order is still something you want to make a priority. Many don’t consider their debt-to-income ratio unless it gets out of control. If you find yourself falling short on payments or just barely making minimum payments, your debt-to-income ratio is falling into unstable territory.

Are you unsure what to do in order to find it? Don’t let the fear of the unknown, keep you in the dark about something as important as your financial future. Anyone can find out what their debt-to-income ratio is by combining all their expenses or debt and divide that by your income. You want your debt to be a minimal portion of your income, because that shows you are financially healthy and are able to manage your money. It also means that if you were to have a decrease in income for some reason, you would have a better chance to recover since your debt wouldn’t be overwhelming in comparison to your income, even if it were to decrease.

Why Your Debt-to-Income Ratio Matters

If you are thinking about purchasing a home or possibly buying a new car, you want to evaluate your own debt-to-income ratio as you could save money on high interest rates and improve your chances at approval for the amount you need. Most lenders want you to keep your debt-to-income ratio around 30%, although that doesn’t mean you won’t get approved if it’s higher.

One way to lower your debt-to-income ratio is to start by lowering your debt. You can do this by increasing monthly payments, and always try to get the higher interest cards and loans paid off as quickly as possible. The more money that can be applied to high interest loans, the sooner you can start paying down some of the lower interest cards or loans.

You want to do your best to stop revolving credit, so it is best not to make purchases on credit so that if you are making payments it is actually hitting the balance, and not just keeping it the same overall, but lowering one, while increasing another.

A simple way to improve your debt-to-income ratio is by increasing your income. Try to work some extra hours at work or try getting a side job on the weekends. You can then apply those funds to your debt and hopefully make an impact on your debt-to-income ratio.

Contact Us Today!

If you are considering buying a home or just want to take a look at your potential to purchase, we want to help you figure out the best options for you.  Don’t hesitate to contact us at North Star Mortgage in Jacksonville, FL today!