An Explanation of Debt-To-Income Ratio
An Explanation of Debt-To-Income Ratio
During the pre-Corona period, Kenya’s mortgage market had grown from Ksh. 1S9bn in 2006 to just over Ksh.61bn by mid-2010. That translated to average growth of 34%, indicating an exponential increase in mortgage loans. However, according to a recent survey conducted by the CBK, there was a 3.7% decrease in mortgage loans as it dropped from 27,993 at the end of 2019 to 26,971 at the end of 2020. This can be attributed to the effects of the COVID – 19 pandemic that rocked every sector of the economy. The world is learning to live with the virus and as such we are returning to normalcy. In this regard, Kenya Mortgage Refinance Company is committed to offering affordable mortgage options and you might want to take advantage of this. On your path to getting that mortgage and owning your dream house, you may come across the term “debt–to–income ratio”. This is one factor that lenders consider looking at before considering you for a loan. This article explains the debt-to-income ratio, how to calculate it, and how you can lower it.
What Is the Debt-To-Income Ratio (DTI)?
DTI refers to the percentage of your gross monthly income that goes to debt payments. In other words, it is all your monthly debt payments divided by your gross monthly income. The DTI is widely used by lenders to measure your ability to manage the monthly payments to repay the money you plan to borrow. This gives lenders an insight into how much you can borrow. It is safe to say that it is as important as your credit score.
Knowing your DTI is important because it is a reflection of your financial health. The DTI percentage can be a reality check as it will give you an idea of where you are financially and where you would like to be. Based on that you can be able to decide whether or not you should go for credit. The only way to know your DTI is through calculating it.
How To Calculate Debt To Income Ratio.
The word calculate makes most of us want to run a mile to our calculators, however, this will be a simple arithmetic operation and it’s no brainier (maybe just a little bit of brain required). The first thing is you need to determine your gross income before taxes, this includes all your sources of income, including side hustles. The next step is you need to determine your monthly debt payments. The last step is calculating your DTI. Below is an example
Monthly debt total (In KSH): 90,000
Car loan: 30,000
Mortgage: 60,000
Gross Monthly Income (In KSH):200,000
Primary Job: 120,000
Side Hustle: 80,000
Debt – to- income calculation:
- Divide total monthly debt by your gross monthly income
90,000/200,0000 = 0.45
- Multiply the result by 100 to get the percentage.
0.45 ´ 100 = 45%
The Debt-to-income ratio (DTI) should be as low as possible, generally below 35%, above that it’s too high like in the example above.
How To Lower Debt-To-Income Ratio.
DTI is dependent on two variables; your debts and income. To lower your debt-to-income ratio you can either pay down your debts or increase your income. An accurate DTI ratio will help you monitor your debts and keep you in the know about how much debt you can afford to have. The most important thing is, you need to avoid temporary solutions that only delay repaying your current debts.
NEED HELP TO LOWER YOUR DTI RATIO?
Lowering the DTI ratio can be a challenge, in that case, if you are struggling to come up with ways to lower your ratio and you are looking for financial guidance, our experts are here to help. Contact Elevate Credit today for quick and efficient service and put your mind at ease knowing your wallet is secured and your spirits will be lifted.
