When you apply for a loan, a key indicator when evaluating your profile is the DTI. This ratio is calculated by dividing your total debt by your gross income. More about this ratio here:
How to calculate DTI
To calculate your debt to income ratio, you will need to add up all your outstanding payments, including credit cards, loans, mortgages, or any other debt listed on your credit report. When adding up your monthly payments, use the minimum payment for the variable ones. Then, you will need to calculate your total income, including any form of income you have before taxes. Finally, divide your total debt by your total income to get your DTI.
A high DTI indicates that the person will likely have difficulties repaying a loan. Although each loan you apply to has independent parameters, an average DTI of 43% is the maximum number to still be qualified for a mortgage. The best thing you could do is keep your DTI below 36%, which will give you benefits when applying for loans.
How to lower your DTI
Good credit management will lead to healthy financial indicators. The best way to lower this rate is to remove as many monthly payments from your spending as possible. If you can afford to pay off little debt, it would be an excellent way to lower your ratio, and you will see it reflected immediately. When obtaining a loan, consider adding another person to it. As long as the other person has a lower DTI than yours, this could reduce the total DTI by adding both indicators.