As you consider buying a new home, it’s essential to get familiar with the various home loan terminologies, especially if it’s your first time. If you have been researching housing loans, you might have come across the term debt-to-income ratio (DTI). It’s every essential to familiarise yourself with your DTI, especially if you already have loans to pay off.

But what is debt-to-income ratio? Well, here’s a quick guide for you to understand DTI so that you can assess your financial readiness for a home investment and be prepared when you apply for a housing loan.

What is the debt-to-income ratio?

Your debt-to-income ratio tells how much money you spend on loan repayments vs how much money you earn. It’s a metric used by lenders to evaluate your loan repayment capability.

When you apply for housing finance, you’ll need to fulfil the maximum DTI ratio requirements so that your lender knows you’re not borrowing more than you can handle. Most importantly, lenders prefer low-DTI borrowers, as they are less likely to default on loan repayments.

Now, you might be thinking about what expenses count as debt expenses. Well, debt expenses include credit card repayments, personal loans, auto loans, home loans, student loans, taxes, and insurance premiums.

How to calculate it?

To calculate your DTI, sum up all your monthly debts and divide it by your total gross household income.

To illustrate: suppose you have a monthly income of Rs. 1,00,000, out of which you have to spend Rs. 5,000 in credit card bills, Rs. 5,000 in insurance premium, Rs. 10,000 in property taxes, and Rs. 5,000 in auto-loan repayments.

The total debt repayment amount is: 10,000 + 5,000 + 5,000 + 5,000 = 25,000. Next, divide it by your income, which is Rs. 1,00,000. You’ll get an answer in decimal. Multiply it by 100 to get a percentage. In this case, you’ll get a 25% DTI, which is a good ratio. You can also use an online DTI calculator to save yourself the hassle.

But if your debt-to-income proportion is on the higher side, availing of housing finance can become a challenging task. Solution? Try to reduce your DTI before you approach a lender for a loan.

Additional Read: How to calculate your home loan affordability?

How to reduce your DTI?

If you’ve got high DTI, you can reduce your monthly EMIs to bring the ratio down. The best course of action is to refrain from taking any more loans and repay the ones you already have in your name.

Also, keep in mind that your DTI is not the only thing lenders take into account. Your credit history also plays a massive role in getting your loan approved. So, paying back your loans on time is an all-purpose solution, as it reduces your DTI and increases your credit score.

Additional Read:  All You Need to Know About CIBIL Score

To sum up

If you’ve already found your dream home, your next step should be to finance your purchase with a loan. At Tata Capital, you can get desirable interest rates and flexible tenures. We also offer minimal documentation and easy-to-fulfil loan eligibility so that you can move into your dream house as quickly as possible.

Plan your finances right away with Tata Capital’s home loan EMI calculator.

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