Friday 01 December 2023

Debt To Income Ratio Is An Important Factor In Buying A House

Debt to Income Ratio

In order to qualify for a mortgage loan readily, you must have a significant debt to income ratio. This is calculated as a percentage of your income which goes towards the payment of your monthly debts. It helps to assess how much you can borrow and how much you can readily handle as your mortgage loan’s monthly repayment. So, along with a strong credit score and job security, this debt to income ratio also plays a very important role in your availing a mortgage loan.

Debt To Income Ratio Is An Important Factor In Buying A House

Way To Calculate

When you approach a lender to take a mortgage loan to buy your dream home, the lender calculates your debt to income ratio after considering many things. It is primarily a calculation based on your income and expenditure toward loan repayments excluding your other living expenses. They divide your monthly obligations for debts by your pre-taxed income. The quotient thus arrived gives your debt to income ratio. Most of the creditors favor a ratio to the extent of up to 36% and not more to allow you to get a mortgage loan easily.

Types Of Ratios

There are two types of DTIs. The front end ratio which is also called the household ratio is the amount of your expenses related with home like property tax, probable monthly mortgage, insurance and other fees for your homes all taken together and divided by your gross income. The other one being called the back end ratio in which all other monthly debts like credit cards, student loans, car loans or personal loans are added to the proposed house expenses. This is the reason that back end ratio method results in higher ratio than the other.

Ways To Lower It

It is better to have a lower DTI so that your chances for loan approval increase. It will also enable you to pay off your debt more comfortably. You can lower your DTI in several ways, browse net to know more, one of which is by paying off higher interest credit card debts as well as consumer debts which carry high rate of interest. You can also lower your DTI ratio by abstaining from taking any further loans. Try not to make any big purchases on credit before you get your home loan. Lastly, before you apply for a home loan, try to pay off the most of your current debt.

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Debt To Income Ratio Is An Important Factor In Buying A House

Last But Not Least

If you find that your debt to income ratio is exceptionally high, then it is better to wait for your mortgage loan. During this period you can make proper planning to control and pay off your debts, at least those with high interest rates, and bring down your DTI ratio. Remember that before you take a mortgage loan, lenders will use their calculators and lower the ratio, higher the chance of getting more amount as a mortgage loan. So, manage your debt well in advance by prioritizing the debts according to their rates of interest, pay them accordingly, negotiate on interest rates, save money and create a corpus to get rid of your debt fast to buy your dream home and have a good debt.