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Debt. It is a four-letter word that can put a lot of pressure on people. However, it is essential to understand that debt can be effective in achieving your financial objectives. And while a small amount of debt will not harm, too much debt slowly turns us into a nervous, anxious, struggling individual. So, the question becomes: What exactly constitutes as “too much debt”? In fact, the answer here is that there is no exact particular answer. That really depends on personal finance.
This blog will discuss how to assess your debt and whether it is too much or not in straightforward strategies.
Check Your Debt-to-Income (DTI) Ratio
It’s not just the total number of debt you have that defines the credit risk situation. It’s also about how much of your income goes towards paying it off each month. It is where your debt-to-income ratio comes in.
To calculate it:
Determine the total of your minimum monthly debt payments: student loans, mortgage/rent, auto loans, credit card minimums, and other regular bills.
Find the ratio by dividing this total by your gross monthly income.
Multiply the result by 100 to find your debt-to-income (DTI) ratio.
It shows lenders and, more importantly, yourself, how much of your income is used in the payment of debts and if one is capable of managing more debts. Typically, the DTI ratio is desired to be below 36%, while going above 43% may be indicative of stress on financials.
When the DTI ratio ranges between 36-41 %, you will be able to show that the debt is easily repayable given steady income and good credit score, thus improving your propensity towards funding.
If you’re looking for a loan with high debt, like a mortgage, specialized options like FHA, VA, or asset-based loans, which are designed to accommodate higher DTIs, can be helpful.
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