Everything to Know About Debt-to-Income Ratio (DTI Ratio)

A housing loan is a contract between the borrower and the lender, wherein the lender gives the loan, and the borrower promises to repay the same within a pre-defined tenure with interest. In other words, a borrower’s repayment capability is a vital consideration for the lender to ensure timely recovery.When you apply for a apply for a home loan , the lender will closely analyze your repayment capability before approving the loan application. The debt-to-income (DTI) ratio is one of the primary tools used by the loan provider in this regard.If you are about to apply for a home loan, then here are 5 things you should know about the DTI ratio-

The debt-to-income ratio can be defined as a relationship or comparison between your monthly income and existing liabilities. Every lender lays a significant emphasis on the loans that you are currently servicing to ensure whether or not you’ll be able to regularly pay the monthly EMIs of the home loan you are about to take.Individuals with a higher DTI ratio are generally considered a credit risk, and the chances of their loan application getting rejected are higher. However, the DTI ratio is only one part of the approval process. The loan can still be approved if the borrower fulfils all the other criteria.

The DTI ratio is calculated by summing up all the monthly debt payments and dividing it by gross monthly income.
For instance, let us assume that Mr Navin has a monthly take-home salary of Rs. 1 lakh. He is currently repaying a car loan and a personal loan. The combined EMI of both loans is Rs. 45,000 per month.Thus, by dividing the monthly debt payment (Rs. 45,000) by the gross monthly income (Rs. 100,000), we get a value of 0.45. If we multiply this value by 100, then we’ll get a DTI percentage of 45%. While the manual calculation is pretty straightforward, you can also find online DTI ratio calculators to help you find out your DTI.

While the expected DTI ratio can significantly vary between loan providers, the majority of the lenders prefer borrowers with a debt-to-income ratio of 20%-40%. If your DTI ratio is between 40% to 60%, then you might still get approved for the loan but at a higher interest rate.The chances of approval are very low for individuals with a DTI ratio of above 60%. But as mentioned above, there are several other factors that lenders take into consideration before approving or rejecting a home loan application.

Yes, there are a few different things that can be done to improve the DTI ratio. Take a look-

• Postpone your decision to purchase a home
• Try to increase the monthly EMIs of existing loans to repay them faster
• You can also consider foreclosing an existing loan
• Avoid taking any more loans until your DTI ratio is under 40%
• Look for ways to generate additional income
• Consider taking a joint loan with a working spouse, son, or unmarried daughter

Knowing your debt-to-income ratio is essential to confirm whether or not you fulfil the eligibility criteria of the borrower. Apart from factors like monthly income, age, and credit history, the DTI ratio is also a vital consideration for lenders.If your DTI ratio is under 40% and you fulfil all the other eligibility requirements, then it’ll be easier to get approved for the loan. If you find out that your DTI ratio is higher, then it’d be wise to first improve it before applying to reduce the chances of getting rejected for the loan.

To avoid any repayment or financial stress, it is crucial for every individual to borrow responsibly. If you are already servicing multiple loans and your DTI ratio is high, then it’d be wise to first clear the existing liabilities before applying for a new home loan.If the decision to purchase a home cannot be postponed for some reason, then you can consider applying for a joint loan as it helps improve your loan eligibility. You can always consult a reputed home loan provider before initiating the application process to avoid getting rejected.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.