Interest rates of home loan are at an all-time low. Many home buyers are tempted to buy a home now that they have been dreaming for years. However, if you think that just your high credit score can help you secure a big home loan then maybe you are not right. Apart from a good credit score, lenders factor multiple other metrics to identify your credit worthiness.
A good credit is obviously necessary but it only indicates your past repayment history and doesn't offer much clarity on your present financial stability. Hence, for big ticket loans, banks do a more thorough and stringent due diligence before approving a home loan.
Debt-to-income-ratio
To identify your final fitness, banks analyze multiple factors including your ability to pay the debt for which you have applied. Let us understand with an example.
If you already have an auto loan and a personal loan along with some credit card debt; then bank will calculate your debt-to-income ratio to analyse your ability to easily service the upcoming loan.
The debt-to-income ratio is calculated by dividing your monthly debt EMIs including loans and credit card payments by your net monthly income. Lenders calculate the ratio on a monthly basis to come up with a realistic figure. The ratio is then factored in to determine ability to comfortably service additional debt along with your current debt.
Low debt-to-income ratio ensure that you have a healthy balance between your income and debt. Normally, 30% is considered as a good debt-to-income ratio.
A higher debt-to-income ratio might convince the lender you don't have the ability to repay additional debt burden at this point in time.
What is the solution?
You can tackle this issue with multiple solution. The simplest one is to wait for a few months while you repay your existing debt at a faster pace to make an acceptable debt-to-income ratio. However, if that is not possible then you can take a loan of lesser amount or a longer tenure to reduce its EMI. You can also go with high-interest rate to secure a loan. If your spouse is working, you can also apply for a joint loan as it divides the financial liability.