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What is debt-to-income ratio? How does it affect my home loan?

When Yash Naidu, a Mumbai-based CG artiste applied for a home loan he was in for a shock. His loan application was rejected even though he had a Cibil score of 816. Besides a good Cibil score, lenders also look at the applicant’s ability to pay off the additional debt burden. This is where Yash had a problem.

April 09, 2014 9:31 IST | India Infoline News Service
“My application was rejected on the grounds that my debt to income ratio was high. A significant portion of my income was going towards servicing my existing student loan. That affected my debt to income ratio,” said Naidu.

Debt-to-income ratio (DTI) in simple words means the amount of debt you have as compared to your overall income. Some industry experts believe that your DTI ratio is probably as important as your Cibil score. Lenders look at DTI ratio when they are trying to decide whether to lend you money. It is calculated by dividing your total monthly debt payments, including minimum credit card payments, auto loan and student loan payments and any other regular debt obligations by your income. A low DTI shows you have a good balance between debt and income.

Your DTI ratio helps lenders evaluate how much additional debt you can handle and how much of a credit risk you pose. Ideally, it should not cross 40 per cent of your income. But that 40% comes with certain terms and conditions. They are:

Your affordability: lenders view that a person should be able to live off the remaining 60% they take home as salary. But can you live off that much salary? That is a question you have to answer yourself.

Ensure you repay every loan: do not ever miss any payment. Make provision for every EMI you owe, whether it is a credit card debt or home loan. Never miss a single payment. Do not get into the thought of good debt vs bad debt. Please understand that you have ta make payment regularly as long as there is debt.Else it could affect your Cibil score.

Consider getting someone to co-sign: That’s what Yash did. He got his father to co-sign. “When they rejected the loan, I got my father to co-sign. I plan to make regular payments for a couple of years. By then I would reduce my overall debt burden, my income would also have increased and thus I would lower my debt –to-income ratio,” said Yash.

Consider taking loan on one person: Try to keep your spouse free of any loan. That way tomorrow if you need to take on one more home loan, there is room for it. This helps in keeping your combined DTI low.

So, keep a tab on your DTI.  Be financially aware and ready to take on loan whenever needed.

The author is Co-Founder & Director, CreditVidya 

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