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You may be puzzled about what the term Debt to Income ratio even means. What the Debt to Income ratio is simply the percentage of monthly household income that is needed to pay off your current debts. No matter what the reason for your debt, if this ratio is more than what the bank feels comfortable with, or what your lending contract requires then it will be harder for you to get a modified loan product. There is a ceiling that has been established for all homeowners stating how much of their monthly income they can use to pay off all of their debts. The limit set is 31% of your take home pay. In layman terms, this leaves you 31% of your monthly income to pay for your mortgage and any other loans that you are responsible for. If this debt ratio increases the limit, then you might not be able to get a modified loan for your mortgage.
Why Debt to Income Ratio Affects Loan
If you have endeavored to pay down or pay off several different loans and the amount you are paying has exceeded 31% of your monthly take home pay, chances are that your loan will be denied. The bank will only approve you and loan money to you after feeling comfortable about your ability to repay the funds borrowed. However, if you are already paying more than 31% of your income towards debt, the bank has serious concerns that you might not be able to repay your loan. However, if the total amount of your monthly payments is roughly around 25% of your earnings, then you can easily get a altered loan for the 16% that you still have left.
Amount Of Altered loan And Your Income
The amount to be authorized for altered loan is also based upon your Debt to Income allotment. For example, if your earnings are $8000 a month, then 31% will be $3040. If you are only paying $1000 towards other debts, then you will have an extra $2040 to pay towards another altered loan. However, if you are already paying $2500 towards other debts, you will only be approved for another $540. So this is the way that Debt to Income ratio affects your altered loan application.
Reducing Your Debt to Income Ratio
One of the fastest ways to reduce the Debt to Income ratio that you have is to pay off your credit cards if possible. Starting with the newest card in your wallet, pay off the card and close the account. Keep the oldest, most established cards that you carry and pay them down as much as possible, running a small balance that is no more than 30% of your available credit. You can also call the card issuer and ask them to reduce the amount of available credit. The reason that this is necessary is that lenders will look at available credit as money that you could spend if you wanted to, so it affects you negatively to have a large amount of credit at your fingertips. Keep only the minimum number of old accounts open. The same is true for revolving charges with catalogs or stores. Pay them off or pay them down, and close the ones that you have had open for the least amount of time.
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