Why Your ‘Debt-to-Income Ratio’ Number Matters When Obtaining a Mortgage

If you are looking to buy a home, you may want to consider shopping for a loan first. Having your financing squared away ahead of time can make it easier to be taken seriously by buyers and help move along the closing process. For those who are looking to get a mortgage soon, keep in mind that the Debt-to-Income ratio of the borrower plays a huge role in the approval of your mortgage application.

What is a Debt-to-Income Ratio?

A debt-to-income ratio is the percentage of monthly debt payments compared to the amount of gross income that a person earns each month. Your gross monthly income is typically the amount of money you earn before taxes and other deductions are taken out. If a person’s monthly gross income is $2,000 a month and they have monthly debt payments of $1000 each month, that person would have a DTI of 50 percent. The lower the DTI the better. 43 percent is in most cases the highest DTI that potential borrowers can have and still get approved for a mortgage.

What Debt Do Lenders Review?

The good news for borrowers is that lenders will disregard some debt when calculating a borrower’s DTI. For example, utilities, cable, phone and health insurance premium would not be considered as part of your DTI. What lenders will look at are any installment loan obligations such as auto loans or student loans as well as any revolving debt payments such as credit cards or a home equity line of credit. In some cases, a lender will disregard an installment loan debt if the loan is projected to be paid off in the next 10-12 months.

What Is Considered Income?

Almost any source of income that can be verified will be counted as income on a mortgage application. Wage income is considered as part of a borrower’s monthly qualifying income. Self-employed individuals can use their net profit as income when applying for a mortgage, however, many lenders will average income in the current year with income from previous years. In addition, those who receive alimony, investment income or money from a pension or social security should make sure and include those figures in their monthly income as well when applying for a loan.

How Much Debt Is Too Much Debt?

Many lenders prefer to only offer loans to those who have a debt-to-income ratio of 43 percent or lower. Talking to a lender prior to starting the mortgage application process may help a borrower determine if his or her chosen lender offers such leeway.

A borrower’s DTI ratio can be the biggest factor when a lender decides whether to approve a mortgage application. Those who wish to increase their odds of loan approval may decide to lower their DTI by either increasing their income or lowering their debt. This may make it easier for the lender and the underwriter to justify making a loan to the borrower. For more information, contact your local mortgage professional today.

4 Things Not To Do When Buying A Home

4 Things Not To Do When Buying A HomeThere is a long list of things that people need to do when they are looking to buy a home; however, it is also important for people to know what to avoid as this process unfolds. There is a lot for people to remember and it is easy for people to get carried away when they start looking at their dream homes. Even though it is great to look at a bunch of houses and imagine living there, it is critical for people to stay grounded and know what to avoid.

Do Not Make Any Large Purchases During The Home Buying Process

One of the biggest mistakes people make when they are looking at buying a home is they open their wallets too big. If people end up taking on other big purchases, they end up accruing more debt. This is going to mess up their debt to income ratio and will make it harder for people to qualify for a home loan. Therefore, try to avoid making any other large purchases during the home buying process.

Do Not Take Out Multiple Credit Inquiries

While this might not sound real, the truth sometimes hurts. The more times people pull their credit report, the worse it looks. Therefore, by making multiple credit inquiries, people could actually hurt their credit score. It is important for people to pull their credit score at least once to fix any inaccuracies that might be present; however, people should not get carried away.

Do Not Skip The Pre-Qualification Process

Many people want to avoid filling out excess paperwork; however, the pre-qualification process is a good idea. When someone pre-qualifies for a mortgage, they get a budget ahead of time and immediately look like a serious buyer. This means that their offer looks more competitive to a potential seller. Finally, the pre-qualification process could also help someone qualify for a lower interest rate.

Do Not Be Anxious

The process of buying a home can be stressful even for those who have been through it before. Just remember to ask questions along the way and individuals will be set up for success. There are trained professionals who are willing to lend a helping hand to those in need.  

Common Reasons Why Buyers Are Denied A Mortgage

Common Reasons Why Buyers Are Denied A MortgageWhen you are buying a new home, it is an exciting process. You have spent months searching and have found the home you want to purchase. You are ready to move into the home of your dreams. 

Unfortunately, you have found out that your request for a mortgage has been denied. This can be a deflating experience. Fortunately, there are ways to avoid this by understanding the most common reasons why a buyer is denied for a loan.

The Loan Requirements Have Changed

One of the most common reasons why you might be denied a mortgage is that the terms of the loan have changed. For example, the lender might have raised the minimum credit score requirement. This might sound unfortunate; however, it does happen from time to time.

Loan requirements might change from the pre-approval stage. If this happens, think about searching for a loan from a different lender.

You Added Debt

The debt to income ratio is going to matter when applying for a loan. If you are pre-approved for a loan and your amount of debt changes, the lender is going to look at this closely. Common forms of debt include student loans and credit cards.

Even small changes in your debt amount can impact your ability to qualify for a loan. Try to avoid buying a new car or maxing out a credit card during the mortgage application process. This will help you keep the loan you’ve worked so hard to earn.

You Changed Jobs

Finally, employment status also matters to the lender. When you take out a loan, the lender needs to know that this will be repaid. This depends on you having a steady stream of income from your job. 

If you decide to change jobs between the time of pre-approval and the time of purchase, your employment history and income stream do not mean as much. While changing employment will not totally disqualify you, make sure to discuss this possibility with your lender. Changing jobs within the same field is likely fine; however, moving to a new career entirely can be a red flag.

Mortgage Denials are Frustrating

It is frustrating to have your request for a loan denied. Fortunately, understanding these common reasons can help you avoid this deflating experience. Think about all of these possible scenarios when you apply for a home loan. And rely on the expertise of your trusted home mortgage professional.