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The Importance of a Good Debt to Income (DTI) Ratio

July 27, 2019

It is evident to most people that having more income and less debt is good for their finances. If you have too much debt compared to income, any shock to your income level could mean you end up with unsustainable levels of debt. Every month you have money coming in (your salary plus additional income) and money going out (your expenses). Your expenses include your recurring bills for electricity, your cell phone, the internet, etc. There are also regular amounts that you spend on necessities, such as groceries or transportation. On top of all of this, there’s the money you spend to service any debts that you may have. These debts could include your mortgage, rent, car loan, and any student loans, personal loans, or credit card debt.

 

What is the Debt-to-Income Ratio (DTI)?

The Debt-to-Income Ratio (DTI) lets you see how your total monthly debt relates to your gross monthly income. Your gross monthly income is your total income from all sources before taxes and other deductions are taken out. Below is the formula for calculating your DTI:

DTI = (Total of your monthly debt payments/your gross monthly income) x 100

 

Example: Let’s suppose the following. Your gross monthly income is $5,000, and you pay $1,500 a month to cover your mortgage, plus $350 a month for your student loans, and you have no other debt. Your total monthly payments to cover your debts amounts to $1,850.

 

Your DTI is (1,850/5,000) x 100 = 37%

Here’s a handy calculator to work out your DTI.

 

Why is Your DTI Important?

Your DTI is an important number to keep an eye on because it tells you whether your financial situation is good or if it is precarious. If your DTI is high, 60% for example, any blow to your income will leave you struggling to pay down your debt. If you are hit with some unexpected expenses (e.g., medical bills or your car needs expensive repairs), it will be harder for you to keep on top of your debt payments than if your DTI was only 25%.

 

DTI and Your Credit Risk

DTI is typically used within the lending industry. If you apply for a loan, a lender will look at your DTI as an important measure of risk. If you have a high DTI, you will be regarded as more likely to default on a loan. If you apply for a mortgage, your DTI will be calculated as part of the underwriting process. Usually, 43% is the highest DTI you can have and likely receive a Qualified Mortgage. (A Qualified Mortgage is a preferred type of mortgage because it comes with more protections for the borrower, e.g., limits on fees.)

 

So, What is a Good DTI?

If 43% is the top level DTI necessary to obtain a Qualified Mortgage, what is a “good” DTI? According to NerdWallet, a DTI of 20% or below is low. A DTI of 40% or more is an indication of financial stress. So, a good rule of thumb is that a good DTI should be between these two figures, and the lower, the better. 

 

The DTI Bottom Line

Your DTI is an essential measure of your financial security. The higher the number, the less likely it is that you’ll be unable to pay down your debt. If there are months when it seems that all your money is going toward debt payments, then your DTI is probably too high. With a low DTI, you will be able to weather any financial storms and maybe even take some risks. For example, if you want to take a job in a field you’ve always dreamed about but are hesitating because it pays less, it will be easier to adjust to a lower income. Plus, debt equals stress. The higher your DTI, the more you can begin to feel that you’re working just to pay off your creditors, and no one wants that.

 

DTI and Student Loan Refinancing

Your DTI is one of several factors that lenders look at if you apply to refinance your student loans. They may also assess your credit history, employment record, and savings. Refinancing your student loans may actually decrease your DTI by lowering your monthly student loan payment. This may help you, for example, if you want to apply for a mortgage. ELFI can help you figure out what your DTI is and if you are a good candidate for student loan refinancing. Give us a call today at 1.844.601.ELFI.

 

Learn More About Student Loan Refinancing

 

Terms and conditions apply. Subject to credit approval.

 

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Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – The bank is not responsible for the content. Please contact us with any concerns or comments.

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2019-09-22
5 Common Questions About Student Loan Refinancing

Deciding to refinance your student loans is a big step in your financial journey. As with any big step, there are often questions that arise. We’re sharing some of the most common questions our Personal Loan Advisors hear from borrowers looking to refinance their student loans. 

1. Will my refinanced student loan have a variable or fixed interest rate?

Either! Education Loan Finance offers both fixed and variable interest rates, giving you the freedom to choose.  Fixed interest rates will not change from year to year, but variable interest rates will fluctuate based on the
LIBOR index and may increase or decrease over the life of the loan. Read our blog about variable and fixed interest rates to learn more.  

2. How long will the application process take?

You’ll be done before you know it! The application process is quick and easy. After providing some information about yourself and your student loans, you’ll upload documents and submit the application. If you refinance your student loans with ELFI, you’ll receive a Personal Loan Advisor who will be your point of contact throughout the process – one person who’ll be with you step-by-step.

3. Can I consolidate both federal and private student loans?

Yes! ELFI allows you to consolidate federal student loans as well as private student loans from multiple lenders. As long as they are student loans, ELFI can consolidate them. However, only student loan debt can be consolidated – no other consumer debt, such as credit card, auto, or mortgage can be included, even if it was used to pay education expenses. 

4. Can I consolidate my student loans with my spouse’s student loans?

While spouses are eligible to serve as a cosigner on an application, we cannot consolidate student loan debt among multiple borrowers – even if they are hitched! 

5. Will the application process affect my credit score?

We’ll run a “soft credit inquiry” during the pre-qualification phase of refinancing in order to provide you with preliminary rates that you may qualify for. A Soft credit inquiry won’t affect your credit score. However, once you choose your loan product and submit your application, we’ll need to view your full credit report – this will show up as a hard credit inquiry. These inquiries are common among student loan refinancing lenders.   Hopefully this short Q&A gave you some helpful insight about what to expect when refinancing your student loans. If you have questions about the student loan refinancing process, you can check out our full list of frequently asked questions or contact ELFI at 1-844-601-3534 to speak with a Personal Loan Advisor. 

Learn More About Student Loan Refinancing

  Subject to credit approval. Terms and conditions apply. NOTICE: Third Party Web Sites Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – The bank is not responsible for the content. Please contact us with any concerns or comments.
Happy couple working on budget
2019-09-20
How to Know When It’s Time to Refinance Your Student Loans

There are plenty of milestones in life that give us reason to celebrate– high school graduation, marriage, the birth of child, paying off student loans. Yes, seeing your debt decrease and your savings increase for many people are a time worth remembering. And truth be told, being further out of debt can make those other milestones much more enjoyable. This blog is designed to help you reach that debt-free milestone quicker by refinancing your student loans. After all, getting them under control and adjusting the repayment terms to something more favorable could help make a dent. Here’s how to know it’s time to refinance your student loans:

You Earn Good Money

No one wants to see their hard-earning income fly out the window. If we’re talking about milestones, we would argue that the 15th and 30th of the month are recurring ones that give us plenty of joy, albeit short-lived. When we see money deposited we want to hold on to it and protect it. However, your debt doesn’t go away. Even though you’re earning good money you will have to face the music and pay off the education that helped get you to the position you’re in. Refinancing your student loans often means a better interest rate and the option to choose a better term.

You’re Credit-Worthy

Many people simply aren’t aware that federal interest rates are not dependent on your financial circumstances. There are a few factors involved, but the credit history of the borrower isn’t one of them. If you’ve been on-time with your credit card, mortgage, car loan, or any other debt, and maintained a good balance between the money you earn versus what you owe in debt, you’ve likely got a high credit score. When you refinance your student loans with a private lender that credit score helps determine your interest rate, and that in return can help save some money.

You Love One Payment

One of the added benefits of refinancing your student loans often means consolidating your loans. While it’s true you can still refinance partial loans, lumping them all together with a nice bow on top not only helps you feel empowered to pay them off, but also reduces the likelihood you’ll miss a payment due to the sheer number of them floating around out there.

You’re incentivized at Work

A growing number of companies are taking a long, hard look at the benefits they offer their employees. Gone are the days of sticking with one job from graduation to retirement. Today, it’s all about working for an employer that offers great benefits, compensation and work/life balance. And because of that, repayment part of an employee’s student loan obligations are becoming the norm. If you’re in this category, it may be wise to refinance your student loans, consolidate them, and watch your employer help pay down your debt. If you can check these boxes chances are you’re ready to refinance your student loans and are one step closer to that all-important milestone of getting out of debt. Speak with one of our Personal Loan Advisors to help walk you through the process.   Subject to credit approval. Terms and conditions apply.   NOTICE: Third Party Web Sites Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the web sites that have links here. The portal and news features are being provided by an outside source – The bank is not responsible for the content. Please contact us with any concerns or comments.
2019-09-16
What I Would Have Told Myself in College: Barbara Thomas

  Barbara Thomas, Executive Vice President of Education Loan Finance (ELFI) provides some financial advice to college students based on her own experiences in college.   Hello, I’m Barbara Thomas. For most, like me, my college days were a great experience that lead to incredible personal growth. I had a marvelous sense of freedom and made many new friends. However, I have spent much time reflecting on what I would do differently if I could begin my college life all over again, given what I know now. Hindsight is a wonderful thing, isn’t it? So here’s my advice to all of you who are preparing to enter college, or are currently in your freshman or sophomore years.

Choose an Affordable College

When looking for the right college, don’t get beguiled by a famous name and a beautiful campus. And, while a state-of-the-art fitness center or an Olympic-size swimming pool might be important if you’re an athlete, most of the time you will be paying for them in higher college fees. Instead, make sure to keep your eyes on finances, as affordability should be a top concern. Considering the fact that many students end up taking on sizeable student loan debt, keep in mind that you (most likely) won’t be living on that beautiful campus in your late 20s or 30s.

Rethink Your Path to the Best Education.

Just because a college is more expensive, doesn’t
necessarily mean that it’s better than one that costs less. You should look upon college as an investment in your future. Consider what the return on investment (ROI) from your college education will look like. In other words, analyze which college is likely to provide you with the most bang for your buck. Here’s a report from U.S. News & World Report that gives you the ROI of different colleges.

Look at Alternatives to a Four-Year College.

If you find out that college is not the best path for you, it can turn out to be an expensive mistake. Keep in mind that dropping out of college won’t make your student loans disappear. So before you enroll in a college, consider these alternatives:
  • Take a gap year to earn money to put toward going to college and give yourself more time to decide what you want to do.
  • Consider attending a trade school to learn a valuable skill with high earnings potential.
  • Spend two years at a community college. Attending a community college can help you save on tuition. However, if you plan to transfer to a college of your choice, be sure to do some checking. Find out how many transfer students are accepted and how many of your community college credits can be used.
Do your research and crunch the numbers to make sure you’re making the best choice.

Earn More While in School

A survey of millennials found that earning money while in college was the number one thing that participants wished they had done (or done more of). This reflects the increasing financial cost that goes along with obtaining a college degree. The College Board estimated that in 2017 (updated figures are available), the average student loan debt upon graduation was $28,500. Keep in mind that a heavy debt load is going to affect your financial future – your ability to buy a home, start a family, and save for retirement. Apart from financial considerations, there is no better way to acquire real job skills than to hold down a job and learn about its demands firsthand. Employers know this, which is why previous work experience is the most popular measure to assess job candidates, even those straight out of college.

Research Ways To Lower Your Monthly Student Loan Payments

So, you’ve done everything right - you chose the higher education path that was right for you, and you have landed an interesting job. Now, what about those student loan payments? Are they weighing you down and preventing you from leading the life that you had envisioned after college? ELFI has a solution to your problem – it’s called refinancing. You can close out your original loan and take out a new one with a lower interest rate and/or a longer term. This can significantly lower your monthly loan payments. Get in touch with us to see how we can help you!  

Learn More About Student Loan Refinancing With ELFI

  Terms and conditions apply. Subject to credit approval.