Lower Your Debt Ratio To Get A Better Mortgage
An borrowers debt ratio is one of the primary factors that a mortgage lender looks at when determining whether or not to give a loan approval. This is essentially the ratio of the applicants personal debt to his net income. Debt ratio is also one of the things that the applicant can adjust before applying for a mortgage, and as such is something that any potential home buyer should take into consideration.
While the formulas for determining debt ratio vary with the lender, finding that there is 30% more income than debt is generally desired. The perfect loan candidate wants to only thirty to forty percent of the net income tied up in outstanding debt. A high debt to income ratio means it would be unwise to add a mortgage payment to the list. The debt to income ratio is also used in determining how large a loan the lender will make and the monthly payment.
The basic formula for determining an applicants debt ratio is to take his net income, divide it by three, and then subtract the amount of outstanding debt. For example, if the applicant has a monthly income of $6,000 and no debt, then $2,000 a month is available for monthly mortgage payments ($6,000 3 = $2,000 – $0 debt = $2,000). However, if the same person has outstanding debt of $2,000 then as far as the mortgage lender is concerned there is no money available for a mortgage ($6,000 3 = $2,000 – $2,000 debt = $0). At first glance, having a net income of $6,000 a month and $2,000 in outstanding debt does not seem too bad, but a mortgage lender would view this negatively. (Of course, keep in mind that every lender has unique qualifications.)
Luckily, there is more to determining a persons ability to pay than just the debt to income ratio. Large down payments and equity investments also have an impact on how monthly payments are calculated. If a borrower has retirement plans and significant stock portfolios this will also come to bear on the payment amount and lending decisions. While these two things, among other factors, can mitigate the effect of a higher debt to income ratio, it is still one of the most important factors for mortgage lenders.
Adjusting the debt to income ratio before applying for a mortgage is an advantageous step that potential homebuyers can do to put themselves in a better position. A borrower can increase the odds of approval by paying off debt before they apply for a mortgage loan.
Wendy Polisi is the founder of Credit Repair College and Finance the Dream. Credit Repair College empowers people to take control of their financial future by learning everything they need to know to repair credit on their own. For more information on credit repair please visit them on the web. Finance the Dream offers lease option homes throughout the United States.
Tags: Credit History, borrowers debt ratio, monthly mortgage payments, net incomeFiled under Bad Credit by 
Comments on Lower Your Debt Ratio To Get A Better Mortgage
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Another advantage of buying a home in a buyer's market is that you can get a new construction or much bigger home for less than you could in a seller's market. Remember, there is an abundance of homes for sale on the market today and …
dWj is right, one should think of a house purchase in terms of an equivalent rent.
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A home for your own use is a consumption good, not an investment. If you sell it later for a lot more money than you bought it for, that doesn't make it a great investment. It only makes it a cheaper place to live than you expected. You can't forget the monthly mortgage payments when you do these calculations.
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