Are you looking to purchase a home in 2018? It is still a great time to invest in real estate since interest rates remain at historical levels, the underwriting of mortgage loans has loosened up and rent prices continue to increase.
There are many factors a mortgage lender uses to determine if a borrower is eligible to be approved for a new home purchase. The top three reasons are a borrower's credit score, the debt to income ratio and the amount of the down payment injected into the transaction.
Many potential buyers, however, really need to understand that the debt-to-income ratio is one of the most important factors mortgage lenders use to evaluate the creditworthiness of borrowers. It measures the size of your monthly debt burden relative to the size of your monthly gross pay. And in addition to your credit score and other financial information, it helps lenders decide whether you’re capable of taking on another loan. Worried that you have too much debt to buy a house? Let’s take a further look at this.
You can calculate your debt-to-income ratio by dividing your recurring monthly debt obligations (such as your minimum credit card payments, student loan payments and child support payments) by your gross (pre-tax) monthly income. When your lender calculates it, that percentage will include your potential new house payment which includes principal and interest per month, real estate taxes per month, homeowners insurance per month and any applicable mortgage insurance premiums per month.
It is very important to note that debt-to-income ratios do not consider the amount of money you’re using to pay for living expenses such as groceries, mobile phone bills, life insurance premiums and car insurance. Even if you think you can afford to take on a mortgage, you’ll need to figure out how that’ll affect your entire budget.
Currently, the maximum debt-to-income ratio that a homebuyer can have typically is 45% if he or she wants to take out a mortgage and also be approved for mortgage insurance. Mortgage lenders want to lend money to homebuyers with low debt-to-income ratios. Any ratio higher than 45% suggests that a buyer could be a risky borrower and the mortgage could potentially go into default.
Many lenders recommend that potential buyers only have a small amount of debt relative to the their monthly income. If you’re trying to qualify for a mortgage, it’s best to keep your debt-to-income ratio below 35-40%. That way, you’ll improve your odds of getting a mortgage with better loan terms.
We at the State Bank of Cross Plains have experienced mortgage lenders who can review your current financial situation to determine how much of a house you can afford and offer advice on which loan program makes the most sense so that you can be confident in purchasing the right home with the right terms.