For homeowners trying to buy a home using a mortgage, lenders use several ways of looking at a potential borrower's credit worthiness other than just the borrower's credit score. One of the more important tools a lenders uses is the Debt to Income Ratio. A borrower's debt to income ratio determines how much they can borrow, what kind of home they can live in and other important factors. Understanding debt to income ratio and how it affects the home buying experience is an important part of the mortgage process.
Debt to Income Ratio Defined
Debt to income ratio is the amount of money owed (debt) versus the amount of money made (income) in any given month. Debt to income ratio is expressed as a percentage. For example, if a home buyer pays $800 every month for their credit cards and loans but makes $5,000 at their job every month, that person's debt to income ratio is 16%. This is calculated by dividing $800 into $5,000.
How Debt to Income Ratio Affects Buying a Home
When the time comes to buy a Vallecito Lake home, mortgage lenders set a cap on the amount of debt that a person can take on. The higher the existing debt to income ratio, the less the home buyer is allowed to borrow for a mortgage. A debt to income ratio that is too high can disqualify a borrower from getting any mortgage.
Lenders pay attention to debt to income ratio because people who have a high DTI are shown to be high risk for default. Lenders avoid loaning mortgages to high DTI borrowers because they must protect their own assets.
The Cap for Borrowing
As a general rule, lenders will only loan money for a mortgage if the combined debt (including the house) equals 43% or less. The house itself should make up about ⅓ of that debt.This cap isn't exactly hard and fast, and it can be hard to predict what underwriters will do. Home buyers who have a large amount of debt and who want to buy a home without paying off that debt may need to shop around for the right mortgage lender. Sometimes, lenders will go as high as 50% debt to income ratio, under the right circumstances.
Eliminating Debt to Buy a Home
Many people who have too much debt to buy a home must pay off some of their debt until they have room to take on a mortgage. It's important to remember that not all debt must be paid off, just enough so that a mortgage will not come to close to the 43% cap. Home buyers can work with their lenders to decide how much debt must be eliminated and how much mortgage the home buyer can afford.
Once they have a goal, a home buyer can make an effort to pay off their debt. At the same time, the home buyer must also be saving money for a down payment and relocation expenses. Working with a financial planner can also help with this process.
An alternative to paying off debt when saving to buy a home is to seek higher paying employment. Making more money on a monthly basis can help reduce the debt to income ratio. But be cautious that lender may also take into account how long a potential borrower has been employed. Someone who has been at the same job for many years making a lower salary will, more than likely, be looked upon more favorably by a lender than someone with a higher salary but has only been employed for a few weeks.
Contact A Mortgage Lender In Your Area
If you have a high debt to income ratio and you're interested in buying a home in the relatively near future, now is the time to talk to a mortgage lender in your area. Your mortgage lender can help you decide the best way to lower your DTI ratio. A qualified real estate agent can usually assist in giving recommendations for a good mortgage broker or lender.