Filed Under (Debt Consolidation) by admin on 23-09-2009
Debt-to income ratio is a financial indicator that helps lenders to ascertain your credibility. Depending on the debt income ratio, a lender decides whether you should be given loan or not. It also evaluates the amount of debt that can be handled by you. Lenders fear losing their money. They have become exceedingly cautious and are approving loans only if consumers are financially responsible. This is where the role of debt income comes into play. In addition to your debt-to income ratio or DTI, credit score is another number that represents your financial responsibility.
Lenders have played a very instrumental role in igniting the subprime mortgage crisis. They approved mortgage loans to borrowers who didn’t qualify for one. This was done by manipulating income of borrowers, furnishing forged documents of property appraisals to help borrowers qualify for a mortgage. The credit crunch or recession is the outcome of the same. It is an aftermath of irresponsible lending that has devastated the American economy.
Debt-to income ratio has 2 ratios- the front ratio and the back ratio. The front ratio indicates your housing costs. It basically takes into consideration the PITI, the principal, interest rate, insurance as well as taxes.
The back ratio indicates the payments you make for your other debts. This includes credit cards, child support, alimony, student loans etc. It also includes the expenses that are mentioned in the front ratio. A debt-to income ratio of 28/36 is considered a standard. The FHA or Federal Housing Administration allows a debt income ratio of 29/41 to qualify for a loan.
Maintaining a debt income ratio allows you to enjoy several financial benefits that the lenders offer. The same is with your credit score. If you have a good credit score and a good debt-to income ratio, you are a lender’s favorite.
A borrower who was not able to bay their debts on time normally takes the debt consolidation process. However, this process can also cost you big amount of money. Know the typical mistake people make in debt consolidation.
Credit Report Amnesia – now, identity theft is one of the fastest growing criminal crimes. That is why it is important to constantly check your credit report in order to make sure that no one is using your identity opening any new accounts or making any charges using your existing accounts. Aside from the identity theft, you should have a good understanding on your credit score. If ever you have scored between the ranges 500 to 620, you will surely have difficulty in getting a debt consolidation loan. Analyze your credit report to make sure that it is error free. Credit reports must be done free from errors by the bureaus that track down your financial life. If you have spotted any, you must report it immediately, for in this way you may have a chance of high-score credit report.
Lack of Accountability – availing of a debt consolidation will not help you out if you do not have enough budgets for it. It is important to track your finances on a monthly basis first. Examine carefully of your expenditures and see if there will be some chance or areas wherein you can cut back on that do not affect drastically your current game plan and will not let your monthly bills to suffer. The reason why it is important to do this examination, because once you have entered into a debt consolidation program, you need to stick to the plan and there is no way for you to escape from it. It will not be any better for you if you will cut your overall payments by $200 to $300 per month just to have some amount to spend for something else. Always see to it that, the moment when you initiate debt consolidation, the amount you will spend for it must not dramatically affect your current spending program.
Relying on Expert - can be another common mistake borrowers had made in settling their accounts. When considering for a debt consolidation, do not rely on someone telling you on which debt to target. You yourself must be the one to decide on this matter by digging up the paper work on your outstanding debts. In addition, it also important to make sure that you are clear on the interest rates and the term for each loan. Knowing the interest for a proposed debt consolidation program versus your credit card rates is also important because if in some way your credit card has low interest rates, then there is no sense at all for you to roll it into a loan. You must avoid in believing the ones claiming to be an expert immediately, for it may lead you into some wrong decision thinking that you have saved a little amount with their offer when it fact its not.
