Calculating and Balancing Debt-to-Income Ratio
When the time comes to begin your search for a new home, you’re likely to require some financial assistance from a bank or lender, and the qualifiers for procuring that help (in the form of a mortgage loan) can be more stringent than ever before, and Home Equity Loan Rates. While you may be aware of the FICO score requirements imposed by many lenders, there are other factors regarding your financial outlook that will also be of interest to your potential lender. One such factor is referred to as your debt-to-income (DTI) ratio. This is one method that banks use to assess how much home you can afford, as well as the approval status of your loan request. Unlike more complicated metrics such as your credit score, calculating your DTI ratio on your own is possible to find your own budgetary limits before consulting with a lender. Working towards a balanced DTI ratio within specified parameters will help to ensure a successful housing search. Let’s take a closer look at how to find your DTI ratio and maximize your chances of obtaining a home loan.
Finding your debt-to-income ratio is essential in order to ensure that you don’t buy more house than you can afford. Careful calculations will lead to a much more reasonable financial outlook in the future.
Whether you use one of the many handy calculators scattered throughout the web or learn the formulas for yourself, determining your DTI ratio is a relatively quick and easy way to gauge your housing budget. Lenders take advantage of the ratio to evaluate your debt load and find a reasonable loan amount to fall within your budget. Including your credit accounts, monthly payments and other recurring debts, your DTI ratio can be adjusted to view your current financial picture as well as the effect that a new home loan will have on your totals. An honest, thorough evaluation of your DTI ratio will help you determine your own loan eligibility before approaching a lender and minimize financial stresses down the road.
Most lenders prefer a DTI ratio of less than 43% to give new homeowners a better chance of paying off their loans within the agreed-upon terms.
According to the Consumer Financial Protection Bureau, mortgage loan studies have shown that borrowers with a DTI ratio over 43% are more likely to have trouble making monthly payments. To determine your own ratio, simply divide all of your monthly debt payments by your household’s gross monthly income. The Nest suggests that a mortgage payment that exceeds 28% of your pre-tax monthly income has a higher probability of leading to trouble down the road. Ultimately, these guidelines may not apply to your individual circumstances, so depending on the knowledge of your lending agent and real estate professional is a good way to supplement your own evaluation.
In some cases, lenders may approve loans with higher DTI ratios if ability to repay the loan is determined through other channels. Depend on your own calculations to ensure your financial future.
There are exceptions to the 43% DTI ratio guidelines suggested by the CFPB, and some small creditors, as well as larger lenders, may be able to process your mortgage application if you’ve shown an ability to repay the loan through other methods. In this case, it is vital to depend on your own calculations in order to avoid financial problems down the road. The Nest recommends maintaining a total debt obligation of no more than 36% of your gross monthly income. Finding a housing budget that falls within that estimate is a great start to avoiding financial headaches following your new home purchase. Take advantage of your team of experts to supplement your own knowledge and estimates when determining a suitable housing budget.
If your DTI ratio is too high for a new loan, follow a few simple steps to prepare for a new home purchase in the near future without risking financial ruin.
Waiting a few months to purchase your new home could be a worthwhile solution if your current DTI ratio doesn’t fall within the recommended limits. Work on paying down monthly debts and increasing your income to get on the road to your dream home in the near future. With proper savings and planning, your housing search and homeownership will be much smoother experiences. Depend on your own calculations, as well as the advice of your financial and real estate teams, before beginning your search for your dream home.
Katy S. writes about Leander homes for sale, mountain biking and cutting trails in and around Austin.