When you are hoping to get a mortgage or other loan, you know that a potential lender will looking carefully at your credit score. But did you know that they will also be examining every aspect of how you use credit?
Debt to Income Ratio for Mortgage
Before you apply for a mortgage, be sure to calculate your debt to income ration for your proposed mortgage and consider these other factors and how they will affect your overall debt to income ration and your budget.
How much do you owe vs. how much do you make?
Examining how much you owe vs. how much your make (your debt-to-income ratio) for a month can be helpful, especially when it comes to understanding a lender’s perspective. A high ratio can send a signal to lenders that your monthly expenses are unmanageable, and that your overall budget will not support a loan repayment. This can obviously discourage a lender from giving you money. In addition to your credit score, your debt-to-income ratio is a primary factor used by lenders in their review of a loan application.
Your debt-to-income ratio is easy to calculate. Simply divide your total monthly debt by your total monthly income. Use your gross (rather than your net) income – it’s the figure most lenders use. The debt figure encompasses those reported to credit reporting agencies, and can include your utilities (as well as any installment loans).
What lenders want
While lenders use different criteria, a good, generally accepted rule of thumb is this: no more than 28% of your income should be allocated for a mortgage payment. The upper limit for this figure is 33%.
What are the possible effects of your debt-to-income ratio? If shopping for a home, it limits the amount you can potentially spend. If your debt is extremely high it can cause you to be denied – even if your credit score is good! But take heart – there are things you can do to increase your chances of securing a loan.
First, look at any installment loans you’re currently carrying. This includes car payments and student loans. Generally speaking, lenders won’t count installment loans against you, as long as you have 10 (or fewer) payments remaining on the loan(s). So, before heading out to secure a loan, improve your standing by paying any installment loan down as much as possible.
Then, make a completely realistic examination of your budget. If getting a loan is important to you, be brutal. Find areas where you can cut back; don’t be afraid to get creative!
- Consider bundling your Internet and cable TV services.
- Are you really using that gym membership, or is it just a psychological prompt for you to get some exercise?
- Determine your priorities, then look at where you can reasonably cut back on expenditure.
- Pay down credit card balances (no, you don’t need to close out the cards; doing so can actually work against you).
- Save money for possible emergencies – remember, experts say that it can’t hurt to have as much as a full year’s income in reserve.
- Avoid making major purchases, such as a new car or furniture for the home you’re hoping to buy.
If you’re unable to get your expenses in check, strongly consider getting help from a qualified financial adviser. Select someone with whom you can be completely forthright about your monthly expenses. They, in turn, will help you get yourself immediately – and permanently – on the right track. If your goal it to buy a home, check around. Some banks have programs for people who need credit counseling to get on track to get meet that goal, they might be willing to lend you the money to buy once you have completed the program.
Before you take on a new commitment, it is important to change your way of thinking about debt. This will not only help you qualify for the loan, but assure that you will be able to comfortably make the payments too.\