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home buying puzzle

Know Your Ratio

  |   Financing, Home Buying   |   No comment

What Your Debt-To-Income Means And How It Makes All The Difference

Knowing your debt-to-income ratio is another piece of the puzzle in becoming a homeowner. Before a Lender can give you money, they first got to have the confidence of knowing that you as a borrower will pay them back. The bottom line is this: When you decide to get a home loan, the lower your Debt-to-Income (DTI) ratio the better. It all comes down to the “risk” that Lenders are going to make when they provide you financing for your home. In the Lender’s mind, like a broken record, they’ll be repeating their fundamental concept – “Ability to Repay”. They will determine that you as a homeowner who has asked for a home loan will have the income and assets to make the mortgage payment through the life of the loan. That’s why it is your job to first know what your ratio is before you seek financing for buying a house. The graphic below will show you how to calculate your DTI by diving your monthly debt you your gross monthly income.

Divide Monthly Debt by Monthly Income
An ideal scenario for a Lender is to approve financing to a borrower with a 36% or lower debt-to-income ratio. However Lenders do prefer a borrower to be within the 30%-45%. Does this mean if a borrower has a higher DTI that they won’t receiving financing? Of course not, it just means that the Lender will consider that borrower as high risk which in return will dictate how a borrower will receive and get approved for financing. This may result a higher interest rate, additional document verification, assets that will need to be verified, a strong FICO Score with solid credit, and a larger down payment that is reasonable to balance the mortgage a borrower will have to make.
expense and income
Considering that you want to buy a home (without an all cash offer), its a priority to manage your income and your debt so that you can position yourself properly once you ask for financing. As a homeowner, you never will want to feel financially trapped or cornered. Before you begin serious home shopping, you have to know exactly how much house you can buy. A good way to begin is to breakdown your monthly costs to establish your budget. You can download this worksheet from Freddie Mac as a start. Couples that choose to live together as homeowners (married or not) and earn dual household income can significantly lower the debt-to-income ratio. Other ways to relieve debt and lower your ratio is to prioritize on the type of purchases you make. Depending on your budget (once you figured it out with worksheet you just downloaded) and when you’re planning to buy a home in the near future, you may want to hold off on larger expenses such as buying expensive electronics like a new TV, or even a leasing or buying a new car. Sometimes it can be a good idea to have more savings by generating more income via a side business or second job. Minimizing credit card expenses and not applying for other loans will help a future homeowner sustain the ideal debit-to-income ratio Lenders want to see.
Ultimately the last thing you’ll want to run into is trouble with making your mortgage payment. Having confidence in how you manage your bills and debt, the income your earn, and they kind of future you will want as a homeowner are all healthy signs for a borrower seeking financing. If you like to know more about where you stand financially in regard to becoming a homeowner, feel free to Contact me directly and I’ll be happy to provide you with everything you need to know about the financing you’ll need and how you can be one!
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