Recently, I had a conversation with a friend who was trying to refinance her home. Two different lenders denied my friend because “her debt-to-income ratio was too high”. My friend was frustrated and asked me why this happened and what her “debt-to-income ratio” meant.
My friend asked me whether taking utility bills out of her name would help. I said “no”. My friend asked me if cancelling credit cards that she no longer used (with a zero balance) would help. I said “no”. My friend could not understand why or what her debt-to-income ratio had to do with refinancing her home. Here is what I wanted her to know.
Your Debt-to-Income Ratio Explained
Your debt-to-income ratio is a personal finance measure that compares your debt to your income. Your debt-to-income ratio is calculated by dividing your total monthly debts by your gross monthly income (given as a percentage). This is a general benchmark that is used together with other indicators to determine your creditworthiness (particularly when buying a house).
For example, let’s say my friend’s total recurring monthly debt was comprised of a $1,000 housing payment (mortgage, pmi, taxes), a $600 car payment, a $200 car payment, a $220 credit card payment, and a $350 student loan payment, …show more content…
You can do this in the most obvious way of paying off debts. If my friend paid off one of her car loans, then she would have less debt and a better ratio. Another way to decrease her debt is to get a car out of her name. If one of her cars is actually her husband’s, then she could get her husband to buy it from her, putting the loan in his name, and ultimately decreasing her debt. Because utility bills are not considered debt, taking them out of your name will not affect your debt-to-income ratio. Similarly, closing credit card accounts with zero balances will not decrease your debt-to-income ratio because a credit card with a zero balance is not
My friend asked me whether taking utility bills out of her name would help. I said “no”. My friend asked me if cancelling credit cards that she no longer used (with a zero balance) would help. I said “no”. My friend could not understand why or what her debt-to-income ratio had to do with refinancing her home. Here is what I wanted her to know.
Your Debt-to-Income Ratio Explained
Your debt-to-income ratio is a personal finance measure that compares your debt to your income. Your debt-to-income ratio is calculated by dividing your total monthly debts by your gross monthly income (given as a percentage). This is a general benchmark that is used together with other indicators to determine your creditworthiness (particularly when buying a house).
For example, let’s say my friend’s total recurring monthly debt was comprised of a $1,000 housing payment (mortgage, pmi, taxes), a $600 car payment, a $200 car payment, a $220 credit card payment, and a $350 student loan payment, …show more content…
You can do this in the most obvious way of paying off debts. If my friend paid off one of her car loans, then she would have less debt and a better ratio. Another way to decrease her debt is to get a car out of her name. If one of her cars is actually her husband’s, then she could get her husband to buy it from her, putting the loan in his name, and ultimately decreasing her debt. Because utility bills are not considered debt, taking them out of your name will not affect your debt-to-income ratio. Similarly, closing credit card accounts with zero balances will not decrease your debt-to-income ratio because a credit card with a zero balance is not