How does your debt-to-income ratio affect your credit score?

illustration of How does your debt-to-income ratio affect your credit score?

What is debt to income ratio?

Your debt-to-income ratio is a number that’s the result of adding up all your monthly payments or bills, and then dividing it by your monthly income. 

This number is one way lenders measure your ability to manage the monthly payments to repay the money you plan to borrow. Your debt-to-income ratio is a comparison between the amount you owe each month, i.e. your outgoings, and the amount you have coming in each month. This is something lenders will use to work out whether you can afford to make your mortgage repayments. 

How is debt to income ratio calculated?

To work out your debt-to-income, you’ll need to do a bit of maths. Use the following equation to calculate what your income looks like compared to your outgoings.

(Total recurring debt / Gross monthly income) x 100 = Debt to income ratio (%)

Here’s a breakdown of how to do that sum, and an example.

  1. First, add up the total of all of your recurring debts and bills each month.

  2. Second, add up your income each month. 

  3. Third, divide your total debt and bills by your monthly income. 

  4. Finally, multiply that figure by 100 to find out your debt to income ratio as a percentage.

For example, based on a total monthly debt and bills total of £1,500 and a gross monthly income of £3,500, you’d get the following:

(1,500/3,500) x 100 = 42.85%

This would give you a debt-to-income ratio of 42.85%.

What’s a good debt to income ratio?

A lot of mortgage lenders would prefer you to have a debt-to-income ratio of below 43%, with some preferring it to be lower than 36%.

Generally, the lower your debt-to-income ratio, the better. But don’t worry if yours isn’t below 43%. Mortgage lenders all have their own criteria they use to decide whether or not to lend to people. If you’re worried about bad credit or a low credit score, read our guide on How to improve your credit score before you apply for a mortgage or speak to a specialist bad credit mortgage advisor.

Will my debt-to-income ratio affect my mortgage application?

Your debt-to-income ratio can affect your mortgage application. Lenders use it when they’re deciding if they’ll offer you mortgage, and if they will, how much for. 

When you’re applying for a mortgage, your lender will request information about your income and bills and debts. To get this info they look at your current account statements and proof of income like payslips or your accounts if you’re self-employed. They’ll also do a credit check on you. Then they use this info to work out what your debt-to-income ratio is.

They’ll use this to assess whether you can afford to repay the mortgage that you’re applying for, in addition to the bills and debts you already pay. Each lender will have different criteria for what they see as affordable, meaning in some cases you may be rejected for a mortgage if your bet-to-income percentage is particularly high. 

Does my debt-to-income affect my credit score?

The only time your debt-to-income could potentially affect your credit score is if you fail to meet your bill or debt repayments. If this happens, it will appear on your credit report. 

Your credit report shows your financial history. One thing that your credit report does not contain, however, is your income. This means that having a high debt-to-income ratio shouldn’t affect your credit score, but a lender will take it into account.

When you’re applying for a mortgage, it’s good to check what your credit score is, so you can see what lenders will see. For more info on your credit score, check out these two guides: 

How to find out your credit score 

How to improve your credit score before you apply for a mortgage

Applying for a mortgage with a high debt-to-income ratio

Having a low debt-to-income ratio usually lines up with having a good credit score. And having a high debt-to-income ratio could mean a poor credit score. Every lender has their own criteria for working out whether they are willing to lend you money for a mortgage or not. Some lenders might have a particular debt-to-income ratio they look for as a minimum, but others are more flexible. 

Bad credit, or a high debt-to-income, shouldn’t stop you from applying for a mortgage. Everyone’s situation is unique and there are many different factors that can affect your debt-to-income ratio. Often, you need to work with a specialist mortgage broker to help you if you have a high debt-to-income ratio, bad credit or a low credit score. They’ll be able to help you even if you’ve been refused a mortgage elsewhere.

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