Realty Executives Midwest
When you apply for a mortgage, your debt-to-income ratio (DTI) will play a vital role. The mortgage lenders will review your credit profile and check the DTI ratio to assess your affordability. So, the debt-to-income ratio will indicate how much debt you carry, such as credit card balances, payday loans, medical bills, personal loans, and utility bills against your monthly income.
Most borrowers know how much their credit score is, which is essential to show their credit affordability. However, many of us need to learn that, like credit score, the debt-to-income ratio will also affect your mortgage loan or credit approval.
When you take out a loan to buy your residential home, vacation home, or rental home, it will be called a mortgage.
The mortgage interest rate depends on the lender and other factors such as your credit rating, earning levels, and, most importantly, the debt-to-income ratio. Now, let’s discuss how the debt-to-income ratio impacts your ability to get a mortgage.
There are two types of debt-to-income ratios that most lenders accept while reviewing mortgage applications:
As discussed in the introductory paragraph, the lender can assume the risk factor from the DTI ratio before providing a home loan to a borrower. If the borrower’s debt is too high, the borrower can default on the loan amount.
Usually, the lenders follow a rule that the borrower can have a home loan if the DTI ratio is a maximum of 43% of the particular borrower.
So, a borrower who needs a home loan should repay some debt first. This will help the borrower reduce the DTI (debt-to-income) ratio. Thus, the borrower can qualify for a home loan with a favorable interest rate.
Before approving a home loan, lenders check credit scores, which largely depend on the credit utilization ratio. The credit utilization ratio means you have utilized up to what percentage of your credit limit.
Your credit score will be low if you borrow closer to your limit. Thus, your chances of getting approved for a home loan with a favorable interest rate will be lower.
Paying off at least a portion of your credit card debt is a strategy you should adopt. It will help you lower your credit utilization ratio and get approved for a mortgage with a favorable interest rate.
Remember that your income is limited. Manage your spending and card debt payments with this income. With the monthly mortgage loan payment, a new debt burden will be included in your income. Thus, if you pay off the credit card debts, you will have less debt payment on your shoulders.
When you apply for a home loan, the lender will check your credit score and DTI ratio. The interest rate of your home loan will depend on your credit score and the DTI ratio. The lower the lender will offer you an interest rate, the quicker you can pay off the principal balance.
A home buyer should calculate the mortgage loan amount that he or she will have to pay so that he or she may be able to repay the home loan within a definite period.
Fixed-rate mortgage loans are most common among first-time home buyers. A first-time buyer usually takes out this loan for 15 to 30 years. As such, even if the interest rate changes in the market, you will enjoy paying a fixed interest rate on your loan amount.
This is common among home buyers who would like to pay less initially but agree to accept a change in mortgage payment in the future. This change in mortgage payment may either increase or decrease according to the variation in market interest rate. By choosing this type of mortgage loan, the home buyer will have to make a high mortgage payment in the future if, by chance, the interest rate rises suddenly.
With the help of an interest-only mortgage loan, you pay only the interest on the loan amount you’ve taken out for a specific period. During this period, you do not have to pay the principal amount. But once the interest-only period ends, your payment amount increases with the repayment of the principal amount. This loan is helpful for those people who earn money on a commission basis.
Your high debt-to-income ratio may create issues when you apply for a home mortgage. The higher your DTI, the more likely you may face problems. The lender will only entertain your mortgage loan application if you take significant steps to lower it as soon as possible.
So, here are some steps that you may follow to reduce your DTI:
Whether or not you can afford a home loan payment, your lender will come to know about it when they check your credit score and DTI ratio. When you show an impressive credit score and DTI ratio to your lender, chances are you can get a home loan with a favorable interest rate. Thus, paying off your credit card debt before applying for a mortgage is important.
source: Realty Executives
Realty Executives Midwest
1310 Plainfield Rd. Ste 2 | Darien, IL 60561
Office: 630-969-8880
E-Mail: experts@realtyexecutives.com
Realty Executives agents are real estate experts. They have the education and expertise you need to navigate through the process of buying or selling a home. From listing at the right price to making the best offer, our Executives have witnessed the best - and most regrettable - decisions homeowners and homebuyers can make. Every day, they are immersed in every aspect of real estate that includes comparable home price analysis, property surveys, credit reports, open houses, HOA agreements, lenders, title companies, homeowners’ insurance, walk-throughs, terms of sale or purchase, repairs, concessions and closing documents. Let our accomplished Executives help navigate you through the process of buying or selling a home.
