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Debt to income ratio is the ratio between your monthly expenses and your income. Before sanctioning a mortgage for your house, the lenders normally calculate the debt to income ratio to work out your eligibility for the mortgage. The ratio is measured against two qualifying numbers 28 and 36. Higher the ratio, lesser is the chance of getting a loan.

The number 28 refers to a maximum percentage of your monthly income the lender allows you for meeting the housing expenses. This includes the loan principal and interest, private mortgage insurance, property tax, and other expenses such as the home association charges.

The number 36 indicates the maximum percentage of your monthly income the lender allows you for meeting both the housing expenses and the recurring expenses such as credit card payments, car loans, education loans, or any other recurring expenses that will not be paid off in the immediate future after taking up a mortgage.

Let us take an example of a borrower whose monthly income is $4000
28% of 4000 = 1120, i.e., $1120 will be allowed for meeting the housing expenses.
36% of 4000 = 1440, i.e., $1440 will be allowed for both housing and recurring expenses together. This means that the person cannot owe other debts more than $320.

Some loans offer greater percentage allowing you for more debt. For example, the FHA loan has a 29/42 scale for calculating the loan eligibility.

Most of the banks insist that your debt-to-income ratio is below 36%. If it crosses 43% you are likely to face financial constrains in the future, and having a 50% or more debt-to-income ratio means that you should immediately work out strategies to reduce your debts before applying for mortgage.

There are some intriguing facts about the debt ratio. Let us consider the facts about a mortgage capacity for a person whose monthly income is $3000 and has no debt. As per a debt ratio 38%, the amount available for the mortgage will be $1140.

On the other hand, suppose you have $4000 monthly income, and you owe a $1000 debt. If you think you still deserve the $1140 for the mortgage (after subtracting the $1000 debt from your monthly income) you are mistaken. The bank does not count simply the numbers; rather it works on the percentage. You will be allowed $1520 (38% of 4000) per month for paying off your debts, including the mortgage. So after deducting the $1000 for other loans, you are left with only $520 for the mortgage!

To conclude, it is advisable to reduce the debts as much as possible. Banks are not bothered about the figures of your income; rather it is concerned about how much you spend from it. Another aspect to consider is the amount you can save for the down payment. If you pay off all your debts and do not save for down payment, you may plunge into a more difficult situation. In this case, you need to consult a mortgage counselor to decide whether saving for the down payment would be ideal than paying off the debts.

Tags: Car Loans, Credit Card Payments, Debt Ratio, Debt To Income Ratio, Debts, Education Loans, Fha Loan, Getting A Loan, Immediate Future, Insurance Property, Intriguing Facts, Lenders, Loan Eligibility, Loan Principal, Maximum Percentage, Monthly Expenses, Number 36, Principal And Interest, Private Mortgage Insurance, Property Tax

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Most of us will assert that the simple act of possessing a credit card can make a person feel a lot more independent than other things.

The truth is you need to be extremely cautious when applying for a credit card, as it is a complex web of fees, charges, and interest rates (not to mention hidden clauses and terms which are not only illegal but also financially dangerous) which can sink you deep in debt.

Apply for a credit card only if you are sure that you will be able to make intelligent use of it in the near future. But first, you will need a layman’s crash course on credit card interest rates before you secure and swipe your card at the first opportunity.

I have found that interest rates are not the same for different applicants. But usually the means for assigning interest rates on an applicant is based on his credit history. Assuming that you have no history of bad credit, you could end up getting a loan at a relatively low interest rate. Alternatively, you would have no choice but to work hard in order to improve your credit.

This may be done the hard way, by taking the brunt of the compromised interest rate which the bank will assign to you, or to choose a plan with a lower credit limit so that the interest rate follows accordingly. There is also the option of the prepaid credit card. But this method of rebuilding credit is hard to secure and it charges even higher interest costs.

Sure enough, there are low interest credit cards or even zero percent interest plans which are available, but as expected, there is a catch: this low interest may not be valid for over a certain period of somewhere between six months and one year. After the expiration of this low interest period, higher rates of interest come into play. For a monthly or annual fee, service alerts are offered, informing the borrower as to when his low interest period is due to expire.

But most times, these are nothing more than gimmicks. They are targeted to work in the short term only.

Some credit cards can also be used in an ATM to take out funds within the credit limit, but the interest is usually charged from the date of withdrawal, and not from the monthly billing date. This means that the issuer gets a higher payback in interest rate from the transaction than usual.

Bear in mind the fact that many credit card providers offer varying rates of interest. So make sure you know what you are getting into. Some may lure you with teaser offers of low rates for a certain period, whereas the regular rates can get as high as 40 percent.

Since there are no fixed regulations concerning interest rates and penalties on late payments, some issuers forfeit the teaser rates if the borrower does not make the payment on time, and replaces it with a penalty interest rate. Some can even be so unscrupulous as to charge interest even if the balance is fully paid on the due date.

Ideally, you should be shopping around for credit cards that are really cheap. But it is not enough to charge low rates. The card should offer terms that would be convenient for the borrower.

Tags: Applying For A Credit Card, Bad Credit, Brunt, Crash Course, Credit Card Interest, Credit Card Interest Rates, Credit History, Getting A Loan, Gimmicks, Hidden Clauses, Interest Costs, Interest Credit Cards, Interest Plans, Interest Rate, Layman, Low Interest Credit Cards, Prepaid Credit Card, Rebuilding Credit, Six Months, Swipe Card

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