DTI: The Ultimate Number That Determines How You Get A Loan
posted on Jul 3, 2020 | 433 likes
What is your DTI?
When applying for a loan, one of the things that lenders will look at is your debt-to-income ratio.
If this ratio is too high, it may keep you from getting approved. Don't take any chances — know your debt-to-income ratio and take steps to keep it at a healthy level.
What is Debt To Income Ration – DTI?
Your debt-to-income ratio is a personal finance measurement that compares your debt to your income and is used together with other indicators to determine your creditworthiness.
The math is simple and even you can solve it and have an estimate of your DTI.
DTI is calculated by dividing your total monthly debt payments by your gross monthly income, and is written as a percentage.
Let’s see an example.
Let’s say Ayo’s total recurring monthly debt payments comprises of:
- N50,000 housing payment (including mortgage, Private Mortgage Insurance, and taxes)
- N40,000 car payment
- N80,000 loan repayment from a bank A
Ayo has a grand total of N170,000 in monthly debt repayments.
Let’s also assume that Ayo’s gross monthly income is N250,000. This means her debt-to-income ratio would be N170,000/N250,000, or 68%.
A debt-to-income ratio of 68 percent is high, and Ayo would have a hard time getting a loan (or refinancing) without changing something.
How To Change (Reduce) Your DTI Score
At any given time, there are basically three things you can do to reduce your DTI and increase your borrowing power.
1. Increase Your Income
In the simplest form, increasing your monthly income has a direct proportionate effect on your DTI. Here’s an illustration drawing from the example above.
Let’s say Ayo has the same debt but increased her income from N250,000 to N500,000, her DTI will now be (170,000/500,000 = 34%)
With a DTI of 34% lenders would be willing to consider Ayo for a loan.
2. Pay Off Debts
The second way to improve your debt-to-income ratio is to decrease your debt. If Ayo pays off her car loan, then she will have less debt and a better ratio.
But there’s a catch: DTI is based on your monthly debt payments, not the total amount of the debt.
So if you are making extra payments that does not eliminate a particular loan or reduce how much you pay monthly for that loan, then your debt-to-income ratio remains the same.
3. Refinance Existing Debt With A Lower Monthly Payment
You may be able to reduce your loan payments to ‘bank A’ by refinancing at a lower interest rate or by increasing the number of years over which you repay the loan.
While a lower interest rate is a good thing, we recommend that you consider refinancing that does not extend the amount of time it will take you to pay off a debt.
Regardless of whether your DTI is high or low, there is value in knowing your debt-to-income ratio. If your ratio is high, it can take some time to decrease it. The sooner you know, the sooner you can implement a plan. If your ratio is low, this means you should have an easier time getting approved for a loan or a refinance. Either way, there is power in knowing.
If you have any questions on the subject matter or need further clarification. our support team is available to address any questions you might have in terms of accessing our quick loans, investing, or using our payment solution to enjoy zero charge on transfers and bill payments.