Debt to income ratio and its significance in your life
The need for money is rising and so are the numbers of loans that are being given out to people. The poor financial condition of people has made it really difficult for them to pay off their old debts let alone taking care of the ones recently taken out. Now, it goes without saying that a lender will definitely need something that would help him or her judge the eligibility of the person applying for loans. In other words, it is important to check out if the person applying for a loan has the necessary resources to pay them back on time.
This is exactly what the debt to income ratio has been formulated for. It is a measure of a person’s ability to pay back loans on time. So, what exactly is debt to income ratio?
It is a way of determining if you could afford a mortgage and how exactly it is going to be in terms of value. The value of this ratio is reached by dividing your total monthly liabilities by the gross value of your monthly income. The ratio is generally expressed in percentage. There is a specific value, scoring below which will make you ineligible for a loan. The upper limit of this ratio varies greatly with mortgage lenders and the loan programs that you are a part of.
Well, this is not all about debt to income ratio. There are things that you will have to know to further your understanding of this ratio. The front-end and back-end are the two main types of debt to income ratio.
- Back-end debt to income ratio – The value of this ratio is reached by dividing the total monthly liabilities by total income. It is expressed in percentage.
- Front-end debt to income rati – There is no need to bring the sum total of all your liabilities into this calculation. Your monthly housing payment inclusive of all the insurance and taxes is to be divided by your total income in order to get the value. Just like its back-end counterpart, the front-end debt to income ratio is also expressed in percentage.
This ratio lets you know about your afford ability for a house as well as the maximum value of mortgage amount that you would probably qualify for. Using the value, you can easily know the maximum amount of loan you can take out as per your needs.