Most of the times, banks and other financial institutions want to make it sure that you are able to pay the price back while considering home loans. It is the basic instinct as these people are likely to provide you with more money than what you can afford at one time. So, a type of security is what they exist from the borrowers, before proceeding further and giving them the money needed. One such way to calculate is by checking on the fat that your total debt does not exceed a particular percentage of income. This income percentage is known as debt ratio.
More on the debt ratio:
In case the debt ratio is towards the higher side, then it becomes hard for you to bag a loan from any kind of financial institution. In some of the generous cases, banks might offer you with a debt ratio of 42% but not more than that. However, they might need some lower ratios for any particular case. Most of the time, majority of banks limit your monthly income to 38%, so that you can repay their amount on time, along with the higher interest rates charged. It is always important to check on the available options before it gets too late.
For calculating the debt ratio:
It is quite simple when it comes to calculating the debt ratio. All you have to do is just divide debt by income. Your debt might comprise of minimum payments existing on credit cards along with the loan payments. It further comprises of mortgage payments, which you are likely to have if you get the loan. This package comprises of insurance, taxes, and any form of mortgage insurance premium to be sure. There are certain times, when your debt ratio is more than the allotted 42% and you have no choice left in hand. No bank is willing to lend helping hand if the stakes are that high. The only way to get money for getting home is by paying down the debt first.
Limitations are associated with it:
In case the current debt ratio is more than the 20% targeted mark, then you have to come across some limitations around here. You will even have little choice left in your hand. In case, the current debt ratio is this high to 20%, then borrowing money is likely to be limited severely. It is your duty during such instances to pay the debt down and below the mark of 20%. Most of the time banks consider a moderate debt ratio within 16 to 19% and not more than that. If you want to know more on ways to pay down the debt, you should visit here.
Start paying the high interest debts:
There are sometimes when you are suffering from high interest debts. These interest ratios will add more pressure, giving rise to bankruptcy, and you won’t be able to get mortgage loans for buying a place. During such instances, it is important for you to try to pay down the high interest rates first and catch up for debt repayment policy.