Know your debt to income ratio before taking a home loan

Before we begin, consider Ajay, who has obtained a loan of approximately 15 lakhs for his business. He earns ₹30,000 from his business and has a very good credit score that ranges between 700 and 900. Ajay, on the other hand, has a dream of owning his dream home and has applied for a home loan of 35 lakhs. Ajay is confident that his loan application will be approved, but he fails to get it, shocked to know why?

Ajay qualified for the step of credit score but did not qualify for a good debt-to-income ratio. Is the question: ‘What is the debt to income ratio?’ circling your mind now?

Let’s find out what it is and why you should know it before applying for a home loan.

What is the debt to Income ratio?

The Debt to Income Ratio is calculated by dividing your monthly debts by your monthly income to determine your payback capability. When applying for a new loan, banks are required to perform a debt-to-income ratio based on your pending debts and monthly income, and if your ratio does not match the specified limit, you are ineligible to receive the loan.

How much debt to Income ratio is required and why does it matter?

The method of calculation remains the same for all organizations, but the limit varies by organization. Besides this, the lower the ratio, the greater the likelihood of being approved for the loan. However, 15% has been considered a safe ratio. The importance of calculating the debt to income ratio is to determine if a person can repay a loan while also having other debts to pay off with the income they are generating.

How do I improve my debt to Income ratio?

Having a clean credit history, paying off previous debts, and not taking out any other loans can all help you meet the eligible ratio.

A low debt-to-income ratio increases your chances of getting a loan for not only in real estate but also for other types of loans. Keeping track of your debts and analysing your spending habits on a monthly basis results in good financial health. So it’s time to make your dream of owning a home a reality.

Disclaimer: The views expressed above are for informational purposes only based on industry reports and related news stories. PropertyPistol does not guarantee the accuracy, completeness, or reliability of the information and shall not be held responsible for any action taken based on the published information.