How Debt To Income Ratio Affects Altered Loan

With so many terms in the financial world floating around, you may not know what debt-to-income ratio means. Your debt-to-income ratio is simply what your household income is versus how much debt you currently carry. Regardless of how you got into debt, be it medical expenses or on credit cards, if your debt-to-income ratio is higher than the banking industry standard of 31%, you would be seen as high risk to lenders. Being categorized as high risk can make it difficult for you to qualify for a modified or altered loan product.A debt-to-income ratio of 31% means that you have 31% of your income left over after paying your mortgage and other debts every month. If your debt-to-income ratio is higher than 31%, it means that you are spending more of your income to pay down debts. With a high income-to-debt ratio over 31%, your chances of qualifying for a modified loan decrease substantially.Why Debt To Income Ratio Affects LoanIf you have been trying to pay down or pay off your existing debt and the total is more than 31%, the chances of you being denied for a modified loan product become very great. Lenders nowadays will only approve and loan money to those that they feel will be a good financial risk, meaning those they know will not likely default on the new loan. If your debt ratio is less than 31% (ideally 20-25%), you're likely to be approved for a modified or altered loan product.Amount Of Altered loan And Your IncomeThe amount you receive upon approval also depends on your debt-to-income ratio. For example, if your take-home pay totals $8,000 a month, 31% of that would be $3,040. If you're paying $1,000 towards other debts, then you have an extra $2,040 to pay off the new altered loan. On the other hand, if your debts are totaling $2500 a month for example, your altered loan amount will only be $540. From these examples, you can easily see how the amount of debt you carry from month to month can affect how much you could be approved for.Reducing Your Debt To Income RatioOne of the fastest and most effective ways to reduce your debt-to-income ratio is to pay off any credit debt you may have. Start with the newest card you obtained, pay off the balance and close the account. The credit accounts you want to keep open are the ones that you've had the longest. You want to pay those down as much and as quickly as possible, keeping your month-to-month balance under 30% of your available credit for that account. Keep the lines of communication open with the card issuer and ask about reducing your interest rates on the credit cards and/or asking them to reduce the amount of available credit.This will benefit you once you apply for a loan, as lenders will look at how much credit you have available. Don't forget about revolving credit accounts from department stores or mail-order catalogues. Pay off these accounts as much as you can as soon as you can and close the accounts you've had the least amount of time.