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Debt To Income Ratio: Why It Is Important When Taking A Home Loan?


Debt to income ratio is perhaps one of the most important set of parameters a bank or financial institution would examine when passing a home loan. Why only home loan, it could also be applicable to all other set of loans.


Debt To Income Ratio: Why It Is Important When Taking A Home Loan?
But, it could be more stringent in the case of a home loan, because these loans are large sized loans and have a longer repayment tenure.

What is the ideal debt to income ratio?

No bank would like to define what the ideal debt to income ratio would be. But, some say that the ratio could be 40 per cent. This would include all forms of loans including credit cards.

So, if your income is Rs 50,000 per month, the bank to grant you a loan may want your total debt outflow not to exceed Rs 20,000 a month. This is because they would like you to use the remaining amount of Rs 30,000 for sustenance of you and your family.

What should you do to improve the debt to income ratio?

To improve the debt to income ratio you could go in for a co-applicant. In this way you could improve the chances of getting a home loan, if your ratio is down.

Also, other loans to do not offer the benefits like a home loan. They come with lower interest rate and help to reduce your tax liability. Hence, it is a good idea to pay other loans, so as to improve the debt to income ratio and gain through a home loan.

Different types of debt to income ratio

There are different types of debt to income ratio. One of them is called the front end ratio. In this ratio the authorities look at your household expenses like house taxes, insurance and other fees.

On the other hand there is also a back end ratio, which take a look at the various loans like personal loans, credit card payments and student loans.


Different banks and finance companies may apply a different set of workings for debt to income ratio. But broadly speaking the rates these days would range from 35-40 per cent. Anything below this would be the ideal ratio for banks to lend.

Anything that looks beyond 50 per cent would be a dangerously high debt to income ratio. Banks may not be willing to consider a loan for such high debt to income ratio. Therefore it is very important to use all the mechanisms that are available to bring down the debt levels.

Read more about: debt income
Story first published: Thursday, October 1, 2015, 10:57 [IST]
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