Meet Harsh, a gym trainer who is married with two school-age kids and earns a hefty pay check. He does have his own share of credit card bills and car loans to pay for every month, but he ensures that he never misses a payment and assumes that getting a mortgage for a new home should be a cakewalk, owing to his incredible credit history.
After visiting several banks with all his financial documents, Harsh is informed that he can’t borrow the money since his debt-to-income ratio exceeds 43%.
What is a DTI Ratio and how is it calculated?
Your debt-to-income ratio, or DTI, compares your debt payments to your income on a monthly basis. It’s an important indicator of how manageable your monthly budget is, as it depicts how much of your income is being diverted to payments on debt you still owe.
It is even more important to be aware of DTI if you are planning to apply for new credit soon. It is calculated as follows:
DTI = Total Monthly Debt Payments * 100
Gross Monthly Income
A low DTI ratio indicates a good balance between your debt and income. Conversely, a high DTI ratio can signal that you have too much debt for your income earned monthly. As a general guideline, 43% is the highest DTI ratio a borrower can effectively possess and still be eligible for borrowing credit. However, it ideally varies between 28% and 36% at most lenders, depending on your age and type of credit that you may want to borrow. So, the lower the DTI ratio, the higher the chance of the borrower’s credit application being approved by the lenders.
How Much is Too Much Debt and Does Age affect DTI Ratio?
Age is a key parameter that can influence your DTI ratio and could bear an impact on your qualification to borrow credit. As an individual ages, financial responsibilities also grow – a large part of which includes kids’ education and their future. The debt may also increase proportionately to the rise in income and this may affect the individual’s eligibility to borrow fresh credit. Thus, it’s crucial that the individual learns to manage his/her debts during his/her lifetime for a better DTI ratio, without adversely affecting long-term savings. Here’s how debt can be managed through the years for various age groups, as per their income categories.
Establish Good Habits in the 20s: Handling daily expenses and saving for the future can be chaotic for young adults. The best way to manage this is to maintain a log of expenses until you know your average debt and cut back on items that are excessive. Young adults need to emphasise on savings and make sure that they don’t abuse credit that can take a toll on their eligibility to apply for a house loan in the future.
Get Financially Grounded in the 30s: 30s are the asset-building years when you should invest in financial instruments, buy a home and increase your retirement investment automatically each year. Buying a home can be easier if you have maintained a good DTI ratio in your earlier years. A good DTI ratio shall qualify you to avail better home loan offer, like the Bajaj Finserv Home loan, available on Finserv MARKETS, to buy your dream home. Review your credit score and DTI ratio quarterly are accurate and up to date. Time to have college savings account for kids.
Assess long term goals in the 40s: It’s time to cut back on spending and put more into savings. It is necessary to dial back the risk level and re-evaluate your investments while tweaking your budget. Creating a plan to pay off your mortgage might be helpful. A flexible personal loan like Bajaj Finserv Personal loan, available on Finserv MARKETS, can come in handy to manage any contingent educational expenses of your children.
Pay off major debts in your 50s: Work on eliminating credit card debt, and any type of small loans taken. Adjust your repayment schedule to pay off more towards debt to minimise overall interest rates. Ensure savings are bumped up by 10 – 20%.
Be a vigilant money manager in 60s: Manage your money like it is your new full-time job. Keep on top of your credit because ensuring access to credit may provide the flexibility needed to handle surprises and to avoid tapping into less accessible assets. Review your medical insurance options to reduce unexpected costs.
So, is there an ideal DTI ratio for every age group? Ideally, the answer is NO. It would be impractical to pin up a DTI ratio for each age group as the incomes vary according to their professions, and individual responsibilities. However, it is wise to stick to 28/36 rule in day-to-day circumstances from a long-term perspective and abide by the 43% DTI ceiling during testing times.
Get to know the perfect CIBIL score for Home Loan. You can also read about why personal loan is fastest growing debt type.
It is necessary to dial back the risk level and re-evaluate your investments while tweaking your budget. Creating a plan to pay off your equitable mortgage might be helpful.
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