Read this article it will let you
know if your numbers or ratios are right for getting a loan the better your ratios
look the easier you’ll qualify for a loan I work with a Great Mortgage Broker /
Lender more information at the end of this article.
When you’re ready to buy a house, a
lot of jargon is thrown around. One term you’ll hear a lot is debt-to-income
ratios. If you’re not a math wizard, such lingo can sound intimidating, but it
doesn’t need to. Debt-to-income ratios are simple to figure and use to your
advantage, even giving you the opportunity to figure out how much house you can
afford before you even set out to look.
The debt-to-income ratio is, simply,
the way that mortgage lenders decide how much money you can comfortably afford
to borrow. It is the percentage of your monthly gross income (before taxes)
that is used to pay your monthly debts (not your monthly living expenses). Two
calculations are involved, a front ratio and a back ratio, written in ratio
form, i.e., 33/38.
The first number indicates the
percentage of your monthly gross income used to pay housing costs, such as
principal, interest, taxes, insurance, mortgage insurance and homeowners’
association dues. The second number indicates your monthly consumer debt, such
as car payments, credit card debt, installment loans, etc. Other living
expenses are not considered debt.
So, a debt-to-income ratio of 33/38
means that 33 percent of your monthly gross income is used to pay your monthly
housing costs, and 5 percent of your monthly gross income is used to pay your
consumer debt—so your housing costs plus your consumer debt equals 38 percent.
33/38 is a common guideline for
debt-to-income ratios. Depending on your down payment and credit score, the
guidelines can be looser or tighter, and guidelines also vary according to
program. The FHA, for instance, requires no better than a 29/41 qualifying
ratio, while the VA guidelines require no front ratio but a back ratio of 41.
What if you already have a house or
don’t plan to buy a house for a good period? You still need to know and control
your debt-to-income ratio, so you can avoid creeping indebtedness, or the
gradual rising of debt. Impulse buying and routine use of credit cards for
small, daily purchases can easily lead to unmanageable debt.
Debt-to-income ratio not only
affects your ability to buy a home, but other purchases as well. Debt-to-income
ratios are powerful indicators of creditworthiness and financial health. Know
your ratio and keep it low. Your consumer-debt number should never go higher
than 20 percent regardless. If you let it rise above 20 percent, you may:
Jeopardizes your ability to make
major purchases—cars, homes, major appliances—when you need them.
Not get the lowest possible interest
rates and best credit terms.
Have difficulty getting additional
credit in emergencies.
If you keep a stranglehold on your
spending habits and therefore your debt-to-income ratio, you can:
Make sound buying decisions, and
refrain from frivolous credit purchases and loans.
See the clear benefits of making
more-than-minimum credit card payments.
Avoid major credit problems.
Calculate your debt-to-income ratio
before you begin looking for a house. Get your credit in order so you can get
the best credit terms, the lowest interest rate and the most house possible.
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