Debt-to-Income Ratio and its Impact on Your Home Loan

The Debt-to-Income (DTI) ratio is a financial metric that tallies your total monthly income to your net debt payments for the month. It helps lenders analyse if you can repay them if you take on additional debt on top of your existing ones. This ratio is crucial when applying for credit products like a home loan. The lower your DTI, the more likely you are to be considered as a low credit risk for lenders. DTI plays a vital role in determining your home loan eligibility and terms. 

How does Debt-to-Income (DTI) Ratio Impact Your Home Loan

A healthy DTI ratio can improve your chances of getting a loan on favourable terms. Here's how – 

• Loan Approval: 

Banks and NBFCs are generally more comfortable lending to individuals with lower DTIs as it indicates a lower financial risk. Most lenders have a DTI threshold for sanctioning your home loan. If your DTI exceeds the lender's limit, it may affect your chances of loan approval. 

• Loan Amount: 

Lenders consider your gross monthly income and subtract your monthly debt payments to determine the amount you can afford to repay. A lower DTI ratio suggests that you have more disposable income. So, they consider you eligible for a higher loan amount. 

• Interest Rates: 

A lower DTI ratio can also positively impact the interest rates you are offered. Lenders are often more willing to provide favourable interest rates to individuals with lower DTIs, as it signals higher financial stability and a lower risk of default. 

Related: What Happens When You are Unable to Pay Your Home Loan

Understanding Various DTI Ratios

Simply knowing what your DTI ratio means is not enough. Use this detailed guide to understand where you stand in the eyes of lenders – 

DTI Ratio of 35% or Less: 

This indicates that your monthly debt payments are well below 35% of your gross monthly income. If your DTI is in this range, you are in a good position. You can easily apply for a home loan and expect your desirable amount at moderate interest rates. 

DTI Ratio of 36% to 49%: 

A DTI in this range suggests that a significant portion of your income is allocated to debt payments. While it's still within a range that lenders might consider acceptable, there is room for improvement. Look for ways to reduce monthly debt payments or increase your income to lower your DTI ratio. 

DTI Ratio of 50% or More: 

A DTI exceeding 50% is considered high and hence risky. It tells lenders that the bulk of your income goes towards debt payments, leaving limited room for other financial liabilities. In short, you are struggling with your debt repayments and need to improve your finances urgently.

You might also like: 5 Tips to Get a Home Loan in India

How to Calculate Debt-to-Income Ratio for Home Loan

Understanding Debt-to-Income Ratio for Home Loan in a step-by-step manner is important for a seamless lending experience. You can calculate it using this formula – 

• Determine Monthly Income: 

Add up your gross monthly income, including your salary, bonuses, rental income, or any other monthly earnings you have. 

• Determine Monthly Debt Payments: 

Identify all your monthly debt payments, including mortgage payments, other EMIs, credit card bills, and any other monthly debt obligations. 

• Use this Formula: 

The formula to calculate DTI ratio is: 

DTI = (Total Monthly Debt Payments / Gross Monthly Income) × 100 

For example, 

Let's say your gross monthly income is ₹60,000, and your monthly debt payments (including home loan EMIs, credit card payments, etc.) amount to ₹20,000. 

Therefore, DTI ratio = (20,000 / 60,000) × 100 = 33.33% 

Keep in mind that lenders may have varying criteria for what they consider an acceptable DTI. it's advisable to check with the specific financial institution where you want to apply for a home loan. 

Also check out: Home Loan for Investment Properties: What to Consider

How to Improve Your DTI Ratio

Here are five steps you can follow to lower your Debt-to-Income Ratio (DTI) in the context of an Indian audience – 

• Reduce High-Interest Debt: 

Start with paying off your high-interest debt, such as credit card bills. This can significantly lower your monthly debt payments and improve your DTI. 

• Minimise New Debt: 

Avoid taking on new debt, especially if you are planning to apply for a home loan. This includes avoiding excess credit card debt or new loans that can increase your monthly obligations and hike your DTI ratio. 

• Reevaluate Expenses: 

Review your monthly expenses and identify areas to cut back. Create a budget that focuses on essential spending and reduces discretionary expenses. This can free up more of your income to clear your debt. 

• Increase Income: 

Explore opportunities to increase your income. Look for freelance work, part-time jobs, or passive income streams like rental income. The extra income can help offset your debt and improve your DTI. 

• Negotiate Loan Terms: 

If possible, try to negotiate the terms of your existing loans. You can try using an EMI calculator to regulate your loan tenure against various interest rates to find a balanced EMI that can help to reduce your monthly debt payments. 

• Consider Debt Consolidation: 

Consolidating your debt can help you get lower interest rates on existing loans and reduce your EMI payments. This can be a great way to hit both birds with the same stone as it brings down your DTI ratio and helps manage your monthly payments better. 

 

Implementing these steps can help to improve your debt-to-income ratio and boost your eligibility for favourable terms on your home loan application. Armed with this knowledge, you can now apply for a Home Loan on Bajaj Markets and get a high sum of up to ₹15 Crores at interest rates starting from 8.50% only!