Did you know that your consumer debt load can impact your ability to buy a home? Most people who are searching for a home to buy also need to obtain a mortgage to finance the purchase. You want to be sure that you have the perfect home for your family, which means that you need to have a mortgage that will adequately finance the home you want to buy.
As a home buyer, you don’t want to sacrifice the quality of your home simply because you don’t have the right financing to pay for the property. There are a few things that you need to consider to be sure that you can qualify for the financing that is needed to pay for a home:
When you are talking with a lender about mortgage options, the lender will research your financial information to understand the risk of lending money to you. The goal is to offer a loan in the amount that you will be able to afford, without too much risk for the lender that you won’t be able to pay back the loan.
One factor that lenders always look at is the borrower’s debt-to-income ratio. This measurement compares the amount of debt that you have with household income. Any outstanding payments will be calculated into this ratio, including car payments, credit card balances, student loans, and more.
The total debt payments are added up and compared with your income. This amount is most often calculated on a monthly basis. As an example, if you are paying $350 a month for a car loan, $200 a month for student loans, and $250 a month for credit cards, then you debt load is $900 per month. This debt load is compared with your pre-tax income to determine your debt ratio. So, if you bring in $5,000 per month in pre-tax income, then your debt-to-income ratio is 18%. This number is calculated by dividing the debt ratio with the monthly income.
Qualifications to Getting a Mortgage
Now that you can calculate your debt-to-income ratio, what does it mean for your mortgage application? Higher debt-to-income percentages will make it harder for you to get a loan. Most lenders base their approval decisions on studies that indicate the potential risk of lending money. It has been found that it is better to keep the total debt-to-income ratio below 43%, but many lenders are a bit more conservative and are looking for ratios that are less than 36%.
The requirements vary depending on the lender that will be funding the loan. As a general rule of thumb, it is always better to have a lower debt-to-income ratio, because the lower numbers will make it easier for you to get the financing that you need to buy a home.
There are two ways that you can adjust your debt-to-income ratio: pay down debt or increase your monthly income. With some planning and preparation, you can get your debt-to-income ratio to a level that will make it easier for you to qualify for the financing that you need.
Here at Duffy Realty of Atlanta, we want to help you find the home of your dreams. Call us today to learn more about our top-notch real estate services: (678) 318-1700