How to Improve Debt to Income Ratio
Improving your debt to income ratio is easy. Most banks will allow you to borrow up to a certain debt to income ratio. With many banks, it’s 40%. That means they want to see that roughly 40% of your income could be used to qualifying for a house.
Some might be 45%, some 50%, and others are 30%. But let’s assume just for a moment that it’s 40%. What can you do to make your debt to income ratio as good as possible?
Let me put it to you this way – if you have a credit card debt, that goes against your income. If you have a car payment, that goes against your income. If you already have a house or another mortgage, that would go against your income.
Let’s say you have an investment property. While that goes against your income, the rental agreement actually backs it out of your income. And a bank would normally take about 75%.
So assuming you have an investment property that had a $750 amount of payment on your credit, that would go against your debt to income ratio.
But if you had a rental agreement where you are bringing $1100 a month, the $1000 dollars would totally write off that $750 and then you have $100 left over.
So technically, that investment property has improved your debt to income ratio!
Similarly, if I have the money in the bank to pay off a credit card, our strategists might be able to tell you whether or not it would make sense to pay it off or not. It might make more sense to keep that money in the bank. The bank may feel better about that or it could be used to pay off the credit card debt.
What would that do? That would eliminate your monthly payment. And what does that do your ratio? It’s going to expand it and make it better!
So at the end of the day, having your debt to income ratio analyzed, and to know that you fall inside that bracket, is really important. Also, know that just because you can do something to lower it, it may not be the wisest thing to do.
For example, you have $5000 to pay off. We’ll call it a vehicle loan.
The vehicle loan of that last $5000 was going to save you $300 a month of payment, that would be $300 more a month that might be used for qualifying for a house.
But if you had a $5000 on a credit card payment, and let’s say the minimum payment was $60 a month, that $60 may not make much of an improvement on your debt to income ratio, whereas keeping the $5000 in the bank might actually look better in the eyes of the bank to qualify for that next house.
So with debt to income ratio, it’s important to sit down with some knowledgeable people which could include, for example, a loan officer. They are experts at strategizing the way your debt to income ratio will look best.