Posted: 15 Aug '19

The Impact of Debt to Income Ratio for a Mortgage and How to Overcome this Potential Barrier to Home Ownership

Many young and older adults are not well educated in finance. When your credit score goes up for the first time or the tenth time, you may receive offers to borrow money from a plethora of lenders. Because advertising and gimmicks can be so persuasive, and people have very little education in personal finance, many people will take on debt from these offers that they don't necessarily need, and these debts may prevent them from getting a home.

When you decide that you want to buy a home, your debt to income ratio for a mortgage application may be too high for you to qualify for the house you want.

What is Your Debt to Income Ratio?

(Monthly Debt Payments)/(Monthly Income) * 100% = Debt to Income Ratio

Most banks assessing your debt to income ratio for mortgages do not like to see the number over 42% for all debts including your mortgage payment. Usually, banks want your housing cost to be 35% or less, which only leaves 7% for any other debt payments.

For example: ($1500 Debt Payments)/($5000 Gross Income) * 100 = 30% Debt to Income Ratio

Why Does the Debt to Income Ratio for Mortgages Exist?

Your bank wants to be sure that you will be able to eat, keep the lights on, and pay your mortgage. With a debt to income ratio around 42%, they figure that you can do that.

How do I Manage my Debt to Income Ratio for Mortgage Application Purposes?

Managing your debt to income ratio is easy. Here are some ways that you can work to improve this ratio to give you the best chance of getting the home you want.

  1. Increasing your income will lower the ratio for example if you get a raise.
  2. Forego your daily latte and put that money towards paying down your debt. The best way to work this is to apply the extra funds to your lowest balances, pay those off and move up the chain.
  3. Resist the urge to take on more debt, including more loans or spending more on your credit cards just because it’s available.
  4. If you currently own or lease a new car the payment associated will be included in your debt ratio. If this has too much impact on your mortgage application, consider selling it or getting rid of the lease to purchase a decent car at a lower price.

Chase Your Goals

You may have to make some lifestyle changes, but if homeownership is your primary goal, it will be worth the effort. Contact a mortgage broker today to learn more about your debt to income ratio and take your first step towards home ownership.

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