Posted on August 3, 2009 at 2:20 am I am planning on buying a house and I need a loan.Can you help me understand the  need to reduce the debt ratio? Also, while you're at it, please give me guidelines on reducing my own debt ratio. How do these banks impose these complications on simple people like me.

Posted on August 3, 2009 at 2:25 am If your debt ratio is more than 38% against your income, expect that no bank will give you a loan as they consider this percentage as too high. It's too much of a risk for them to extend you loan. You must first reduce your debt ratio before you apply for a loan. Debt ratio as a qualification is all about the consumer's ability to repay--it's considered low when your total debt exceeds the usual 36-42%.What kinds of debt do you have?

Posted on August 3, 2009 at 2:42 am To give you an example on what reducing debt ratio is about: If your income is $3000/mo. income and you have no debt: Your mortgage payments can be as high as $1140/mo. If your income, on the other hand, is $4000/mo. income and you have $1000/mo. debt: Your mortgage payments can be only $520/mo. This is where reducing your debt ratio becomes important. If you want to be granted a loan for a house of course, you'd want to pay down your debt, but the more you spend on reducing your debt, the less you'll have for the down payment.If your debts are mostly unsecured and you are having a hard time keeping up with the payments--and if your debt amount is not that big but has high interest--consider credit counseling. The reputable credit counseling agencies can help with reducing your debt ratio. Make sure that they are a member of the National Foundation for Credit Counseling. (http://www.nfcc.org).

Posted on August 3, 2009 at 2:45 am Should the consumer reduce the debt or not?

Posted on August 3, 2009 at 2:52 am My vote is, reduce it. It's weird how the debt can't be eliminated at all. Anyway, the consumer doesn't really have much of a choice if his/her debt ratio is more than 38%. It's a no no for banks. The consumer would not be extended a loan if that percentage is not reduced. What if the consumer's debt ratio is more than about 20%, it is still considered high and it translates to his/her borrowing power being limited. The consumer, in this case, would still have to reduce the debt to below  20% -maybe to 16-19%So what now if the consumer has less than 20% debt ratio? It can get the consumer a loan, a better interest rate, and it also makes for a smaller mortgage payment.

Posted on August 3, 2009 at 3:05 am I agree with reducing the debt percentage if the consumer is planning on buying a house in a hurry. But if the consumer can wait until several more months, then he/she can reduce some of the high-interest debts instead (those with more than 10% interest) like his/her credit cards. Paying those would not affect the 20% down on the future house. What the consumer can do to accelerate the debt reduction is pay at least 2-3 times the minimum payment each month, or if he/she can afford more, the better.

Posted on August 3, 2009 at 3:11 am To add to what they've said if the debt ratio is 6% or less paying down your debt would probably not get you a bigger loan, so don't worry about paying it down. Why? It's because banks limit your monthly payment with 2 things. The debt ratio as well as the housing ratio (it is a percentage of your income not related to your amount of debt). When you have just a little debt, or no debt, the limiting factor is the housing ratio.

Posted on August 3, 2009 at 3:14 am What if the consumer does not fit into any of those categories?

Posted on August 3, 2009 at 3:24 am Then reducing the debt ratio or just letting it as it is would not matter much to the bank. Although I wonder what sort of a situation you are referring to. I suppose it would all boil down to the consumer's credit report then. It plays a role on what debt ratio the bank will allow, together with the down payment.So the question is still, should the consumer put more money in reducing his/her debt ratio or on the down payment?I am not certain, perhaps, a debt consultant can answer that. Suzy, if you need to speak with one, feel free to fill out one of the forms that you see here at destroydebt.com and consult with one for free.The best of luck to you.

Posted on August 3, 2009 at 3:37 am Suzy if your your debt that need reducing is unsecured and if it amounts to $10,000 and you have already defaulted on the payments or are about to, consider hiring the services of debt settlement companies. They can reduce your debt balance to 50% and you would have more time to repair your credit after. Make sure that the debt settlement company that you choose is a member of the Association of Settlement Companies (http://www.tascsite.org)