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TIFFANY'S TAKE: WHAT IS DEBT-TO-INCOME RATIO?

personal debt podcasts Nov 15, 2022

Every Tuesday, Tiffany answers one of your submitted questions. To submit a question for an upcoming episode, visit here: https://www.moneytalkwitht.com/asktiffany

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Transcription:

Episode 159

Intro/Outro: [00:00:00] You know what it is. That's right. It's time to talk money with your money nerd and financial coach. Now tighten those purse strings and open those ears. It's the Money Talk with Tiff podcast.

Tiffany Grant: Hi everyone. Thank you so much for joining me for another Tiffany's Take episode where I answer your money questions.

If you want your money question heard and answered on the podcast, please go to www.moneytalkwithT.com/askTiffany and I'll be more than happy to answer for you. There's even a way for you to do a audio version if you don't feel like typing, so definitely check that out. Now, today's question is, what is your debt to income ratio and why is that important? Can you just explain that to me a little bit, Tiff?

Absolutely. So your debt to income ratio is very important, especially if you're looking into buying a house. That is one of the main factors they look at when they're evaluating whether or not they should loan you this money. So [00:01:00] when your debt to income ratio is how much debt you have in relation to the income that you have coming in.

So what do if you have and I'm just gonna use round numbers just to make this easier for us. Let's say you have a thousand dollars a month coming in and you have $500 in debt payments. That means your debt to income ratio is 0.50 or 50%. So when a lender is looking at that, because typically when you're buying a house, they wanna make sure that you're under or around 30 ish.

And so if they're looking at that, they're like wait a minute, if this person. Can barely make ends meet with the debt that they currently have. Why should we give them more money to lend, and so when they're looking at the debt to income ratio, they're trying to make sure that you are work pro.

I have struggles with saying worthy enough, but that's pretty much what it is. They're trying to see if they should lend you the money, what their [00:02:00] chances are of getting their money back. So everybody likes to focus on credit scores, which credit scores are fine and dandy, and they're great. But really when you're looking to buy a house, credit score does matter, but debt to income ratio matters as well.

You could be sitting at a 7 50, 800, whatever, and if your debt to income ratio is out of this world, you still will not get approved. So that's one thing that people typically do not tell you about is that debt to income ratio. So you wanna make sure it's below a certain amount. Now, when you're thinking about lowering your debt to income ratio, cuz let's say for instance now you're like, You know what Tiffany, I get it now I understand what a debt to income ratio is and I looked at mine and it's horrible.

What do I do to make that number go down? So what you would do is either raise your income, Or lower your debt or a combination of the two. So if you're already actively paying off debt, just hold off on buying [00:03:00] a house until you get your debt down to a point where you'll definitely get approved. So that's what I did when I was looking to buy a house.

And when I went to buy a house, I was like, okay. What's my debt to income ratio? Let me hold off a little bit. Let me keep paying down debt. Let me increase my income a little bit and then let me apply. And so don't feel pressured to apply just because you have a seven something credit score, 800 credit score.

Look at your debt to income ratio and see if it makes sense. Now you can pay off debt which. Always ideal for the most part. Or you can also increase your income. So look at ways, maybe you can ask for a raise at work or maybe you can get a new job, see what things are out there for you to increase your income.

A lot of times, and I'll be honest with you, they do not look at self-employment income unless you've been doing it for some time. Like when I got approved, they did consider my Uber and Lyft. [00:04:00] Income that I was getting, but that was only because I was do already doing it for like over a year and I had consistent income every month from it because I would do it frequently.

And so a lot of times they won't look at that. Side hustle type income. So think about that too. See if there are ways that you can increase your actual income, like your steady income, which you have coming from a job, or if you're self-employed. And I will tell you it's harder to get approved for real estate loans when you are self-employed.

So that's another quick tip. If you're looking to buy a house or investment property or anything like that, stay at your W2 because it is very helpful when it comes to trying to get approved. So anyway, that was just a digression and a quick tip, , because I don't want you to end up in a situation where you're like, Oh, my business makes so much, let me quit. But you haven't finished your real estate stuff like [00:05:00] me, and now I'm struggling to get loans because when you're an entrepreneur, they look at things completely different. So anyway, back to the topic at hand. Debt to income ratio. Look for ways you can increase your income or lower your debt. Or a combination of both, and that's how you get that down.

So hopefully that answers your question. If you wanna answer, if you wanna ask your question, sorry, then go to www.moneytalkwitht.com/ask Tiffany, and I'll be more than happy to answer. But just remember, credit score is only one piece of the puzzle. Debt to income ratio is another piece, and there's some other pieces out there.

But that's all I'm gonna cover today. Bye.

Intro/Outro: Thank you for listening, joining and being a part of the Money Talk with Tiff podcast this week. You can check Tiff Out every Thursday for a New Money Talk podcast, but if you just can't wait until next week, you can listen to previous. Podcast episodes at Money Talk with t.com or follow TIFF [00:06:00] on all social media platforms at Money Talk with T until next time.

Spend wise, by spending less than you make a word to the money wise is always sufficient.

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