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Tata Capital > Blog > Debt-to-Income (DTI) Ratio: Know Why Is It Important?

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Debt-to-Income (DTI) Ratio: Know Why Is It Important?

Debt-to-Income (DTI) Ratio: Know Why Is It Important?

Buying a new house requires extensive planning and research on your part. More so, if you plan to avail of housing finance to purchase your dream abode. Did you know that lenders evaluate your financial fitness through various elements besides a good credit score?

Yes, they assess your debt repayment capacity through your Debt-to-Income (DTI) ratio.  Read our article to learn all about the DTI ratio.

What is a DTI ratio?

Debt-to-income (DTI) ratio measures a borrower’s capacity to repay the loan on time. It is calculated in percentage by dividing your gross monthly income with your net monthly debt payments. These debt payments may include your credit card bills, existing loans, etc.

Here, your gross income is the total amount you earn every month before taxes are deducted. Let’s say that your gross monthly income is Rs. 50,000, and you have to pay an EMI of Rs. 25,000 towards a home loan. Then, your debt-to-income ratio would be 50%.

A higher DTI shows a borrower’s inability to pay any new EMIs. Therefore, it is critical to keep your debt at a manageable level if you wish to boost your creditworthiness. How? By maintaining a healthy debt-to-income ratio. A DTI ratio between 21% and 35% is considered very good.

Let’s try to understand what is debt-to-income ratio’s role getting your housing loan approved.

Additional Read: Know all about Debt-To-Income (DTI) Ratio & How to Calculate It?

Importance of debt-to-income ratio

Since DTI is used to assess a borrower’s ability to pay  EMIs, it determines the level of risk for the lender. Having higher income and lower debt depicts good financial health. So, what is the ideal debt-to-income ratio for home loan? In India, the maximum DTI ratio allowed to get a new loan is 40%. But you must keep in mind that a lender will prefer a borrower with a lower DTI ratio.

Thus, a lower DTI ratio improves your chances of getting housing loan approval. The most direct way to impact your DTI ratio is to reduce your EMI amount or increase your gross income. However, you might not have much control over these factors.

Hence, you can try these methods to lower your DTI ratio:

  • Track your DTI ratio every month
  • Postpone big purchases, if you can, before availing of a loan
  • Try not to acquire more debt

Moreover, both the DTI ratio and the CIBIL score determine your creditworthiness. They are essential factors that lenders consider before approving your loan. So, make sure you check them before applying for housing finance.

Additional Read: How to calculate your home loan affordability?

Looking for housing finance options? Turn to Tata Capital!

Opting for housing finance is the most convenient way to finance your new home.  At Tata Capital, we offer a range of home finance options with attractive home loan interest rates, structured EMI options, easy eligibility conditions, minimal paperwork requirements, hassle-free processing, and flexible tenures.

To avail of our home finance offerings, visit our official website and check your home loan eligibility. You can also calculate your EMIs and interest payable with our home loan EMI calculator. So, what are you waiting for? Turn to Tata Capital and move into your desired home soon!

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