The debt-to-income ratio (DTI) is one of two key factors that affect your ability to qualify for student loan refinancing. The other is your credit score. With a credit score, the higher your score, the better your chances of getting qualified for a low-interest loan. With DTI ratio, the lower the ratio the better your chances. If you’re considering student loan refinancing, knowing what is a good debt to income ratio is important. That way, if you fall short of the eligibility criteria, you can work towards lowering the ratio and improving your chances.
But first, it helps to understand how the DTI ratio is calculated and how it impacts your ability to refinance.
The debt-to-income ratio is the percentage of your gross monthly income that you spend to pay off your monthly debt.
Not all of your monthly expenses are taken into consideration for calculating DTI. Only recurring payments such as student, vehicle, and personal loan payments, credit card payments, mortgage, and rent are calculated. Child support and alimony are also considered as part of your debt payments, if applicable. Your total debt payment is divided by your gross monthly income to determine your DTI ratio.
Lenders use this to measure your ability to manage the monthly loan repayments.
A high DTI ratio means most of your income is going towards paying back current debts. This leaves very little to spend on utilities, groceries, fuel, and other everyday expenses. With such a tight budget, you are more likely to struggle to repay the money you plan to borrow. This makes you a high-risk borrower. Most lenders will likely reject your refinance application. Those who do approve will lend you the money at a much higher rate of interest to offset the risk.
A low DTI ratio means your earnings allow you to meet all your current debt payments easily. Adding another payment won’t cause you much financial stress. This makes you a low-risk borrower. Getting approved for student loan refinancing shouldn’t be a problem. Moreover, lenders will also offer you a much lower rate of interest on the refinanced loan.
The Federal Reserve has set a 40% DTI ratio as an indication of financial stress. While every lender sets their own maximum limit, anything over the 40% threshold can make it more difficult for you to get approved. Anything lower than 40% is a good DTI ratio for student loan refinancing.
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