Your DTI application form.
Do you know what DTI stands for?
DTI stands for Debt to Income Ratio.
Your DTI gets calculated when you submit a DTI application form.
There’s a lot to be considered when you submit a credit card application.
Let’s dive in.
How Ratio is Calculated: What is DTI?
According to Investopedia,
“The debt-to-income (DTI) ratio is a personal finance measure that compares an individual’s monthly debt payment to his or her monthly gross income. Your gross income is your pay before taxes and other deductions are taken out. The debt-to-income ratio is the percentage of your gross monthly income that goes to paying your monthly debt payments.”
DTI Application Form: What You Need to Know
While credit scores are held out as the end-all-be-all when it comes to getting a loan, the reality is a review of your credit score is just one part of what happens when you submit a credit application.
Lenders look at five other indicators of your creditworthiness as well.
Here they are:
The Five Cs of Credit
- Character: What’s your track record when it comes to repaying debt? Have you any collections activity? Bankruptcies? Liens? Your credit score does figure prominently here, as it is a numerical distillation of how you’ve handled your financial obligations prior to presenting the application in question. However, it’s just the beginning.
- Capacity: How does what you make compare to what you owe? If you get this loan, will you have enough income to cover it and your existing obligations? The lower your debt-to-income ratio (DTI), the better your chances of getting an approval. You’ll generally have a good shot when your DTI is 35 percent or less — assuming all other factors line up.
Your chances of getting a loan approval increase if your debt-to-income ratio is 35% or less.
- Capital: How much cash do you have to contribute toward the purchase you’re trying to make? The more significant the amount, the more favorable your application will look to lenders. After all, you’re less likely to tap out and leave the lender wrestling with the consequences if you have a lot of skin in the game. They will also want to know what else you have of value they can attach if they need to look beyond your income to seek recompense.
- Collateral: What item of value will be used to secure the loan? If it’s a real estate loan, the property will serve nicely in this regard. The same goes for car loans. However, credit cards and other types of unsecured loans must rely solely upon your promise to pay. This is why interest rates on those types of financing are higher.
- Conditions: What interest rate will your situation dictate? How will this affect the monthly payment? How do you plan to use the money? Is it something the lender feels can be counted upon to produce a sufficient return? What is the situation around the idea you have for the use of the cash? Are there any political or economical issues that could impede your ability to repay the loan?
How These Factors Affect Your Application
As we mentioned above, these indicators will be used to establish your degree of creditworthiness. However, they’ll also factor into how much a lender will charge for the loan (interest rate and associated fees), the amount they’ll approve and the conditions they will apply to the management of the loan.
Before You Apply
Now that you know what happens when you submit a loan application, you can do everything possible to look good on paper. If everything lines up except your debt to income ratio, take whatever steps you need to reduce the ratio. Pay off as much of your debt as possible.
This might mean delaying your application until you get things better situated. If you have a lot of debt and can’t figure out how to deal with it, you may want to look into debt settlement through a program like Freedom Debt Relief or credit counseling through a nonprofit agency.
The main things you want are to avoid being turned down. Plus, you want to get the lowest interest rate and fees possible. Preparing yourself in advance will give you the best chance of getting a loan with terms you can manage.
Readers, please share so other borrowers know how to submit a DTI application form.
I look forward to your views in the comments section. Do you have any input about what happens after you submit a DTI application form?