Did you know that lenders use various tools to evaluate loan applications they receive? They use these tools to determine how to respond to these loan applications. For the lender to approve a loan, the borrower must meet specific criteria. One tool that lenders use is the debt-to-income (DTI) ratio. If you are not familiar with this ratio, you might want to learn some things about it before applying for a mortgage loan.

How Lenders Calculate It

Lenders need some financial information from you to calculate your DTI. They need two main things for this calculation: your income and monthly debt payments. They typically use a person's gross monthly income for the first part of the ratio. The second part is the total of all the person's debt payments. The debt payments do not include normal bills, like utilities or groceries. They generally only include loan payments and things of that nature. When you divide your gross monthly income by your monthly debt payments, you get a percentage. Lenders use this percentage to ensure that you meet their loan standards.

The Purpose of It

The DTI tells a lender if you can afford a mortgage payment. It also tells them how much you can afford. All lenders use this ratio to evaluate a person's loan application, but they also use other factors when evaluating applications.

The Rules of the DTI Ratio

Lenders generally will not issue a loan that causes a person to exceed 43% for the DTI ratio. This standard is normal across the board for lenders.

Ways to Improve Yours

If you want to qualify for a loan, you should make sure you have a low DTI. The best way to achieve this is by lowering your monthly debt payments. For example, if you can afford to pay off your car loan, you will instantly decrease your DTI. The other option you can use is increasing your monthly income. Do you have a way to earn more money? If you can increase your monthly income and decrease your monthly debts, you will improve your DTI. Once you do this, you might qualify for a loan.

If you want to qualify for a mortgage loan, you might want to calculate your DTI before applying. If it is too high, you can spend some time finding ways to lower it. Once you feel ready, you can apply for a loan with a mortgage lender of your choice.

For more information on mortgage loans, contact a company near you.