Your debt to income ratio is usually associated with mortgage loans, but lenders may use it to determine eligibility for auto loans, personal loans, or other types of credit. It's one of those key financial metrics that lenders use to evaluate you as a credit risk.
How is it calculated? Lenders divide your monthly debt payments into your gross income (what you earn before taxes and other deductions).
What is a good debt to income ratio? According to the Consumer Financial Protection Bureau, typically, a lower debt-to-income ratio is preferable because it shows that you have enough income to repay outstanding loans. In most cases, 43 percent is the highest ratio a borrower can have and still get what's called a qualified mortgage. A qualified mortgage is a safer, more transparent loan for borrowers who are eligible.
How can you improve your debt to income ratio? Paying down debt or selling financed assets, like an auto loan, will improve your debt-to-income ratio. But keep in mind that can affect your credit score negatively. So, here’s the deal, let’s say you pay off your mortgage, how exciting is that right? But making that payment showed consistency that you paid your bills, now that’s gone, that can drop your score a bit. But your debt to income ratio likes that you paid off the mortgage.
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