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TERMINOLOGY
Your debt-to-income ratio is a key part of the decision process a lender uses for any type of credit you want. Your debts are the monthly payments you make on your mortgage or for rent, credit card payments, car loans and other installment debt. Some lenders use your gross monthly income in the calculation, while others use your take home pay.
Debt-to-Income Ratio
Your debt-to-income ratio is easy to determine. Add up all of your monthly payments and then divide that total by your gross monthly income. You can also use your net monthly income to get a more accurate ratio, since this is the amount you have available to use for your debt payments.
When you apply for credit, the exact debt-to-income ratio a lender uses in their loan decision is set by their credit guidelines. Forty percent is a popular figure for mortgage loans, which includes all of your debt and the new mortgage payment amount.
If you are denied credit for having a high debt-to-income ratio, ask the lender what their requirements are in order for you to receive an approval. You can then try to reduce your debt-to-income ratio by either decreasing the amount of your monthly payments or increasing your monthly income.
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