Anyone who has ever started applying for a home loan or even looked has seen the dreaded words “debt to income ratio.” As one of the leading reasons people get turned down for home loans, debt to income ratio (also known as DTI) can seem scary. However, with knowledge, you can conquer almost any fear; therefore, in the following article, we will discuss what a DTI is, how it can affect your approval odds for a mortgage, and what you can do to lower your ratio to a more acceptable level.
What is a Debt to Income Ratio?
A is a number calculated by financial institutions that allow them to gauge your ability to pay a future obligation with them. They determine this value by comparing how much income you have every month with your bills and expenditures. To calculate your DTI, divide your total household income by your monthly bills (this means your car payments, your credit cards, your student loans, any child support, and all other monthly expenses) and your proposed new mortgage payment. Typically, banks want your DTI to be less than 40%. If there is not a large enough surplus and the lender feels you may not be able to afford an additional owed amount, it is not very likely they will approve a loan for you. Sometimes having large balances owed such as student loans or higher car payments can cause your debt to income ratio to be very poor.
How Will My Debt to Income Ratio Affect My Ability to Get a Conventional Loan?
Conventional Loans are traditionally one of the more difficult loans to qualify for and having a high debt to income ratio can make it even harder. Banks and lenders like to see a large margin of extra money to ensure their new loan will be covered. Financial institutions do not want there to be just enough money to meet your obligations. They want to guarantee that if there are any sudden changes in your financial situation that you will have had enough extra cash to have saved for emergencies. They try to allow for multiple contingencies. Unfortunately for you, that means stricter regulations that do not allow you to have large outstanding balances while still qualifying for a new home loan.
How Can I Lower My Debt to Income Ratio?
If your debt to income ratio needs a little work, do not stress too much about it. There are a few quick steps that you can take that will lower your DTI in no time.
- Try to add to the amounts that you pay towards your financial obligations each month. Even a few extra payments here and there can help to lower your total owed costs more quickly.
- Try to reduce the number of debts that you are taking on. You can start doing this by limiting the amounts that you use your credit cards and by not applying for any additional loans or extra credit lines.
- Do not make any substantial purchases that require credit to get. Save money to help add to your down payment. The more significant your down payment is, the less credit your loan will need which will help your debt-to-income ratio stay low.
- Continuously monitor your DTI. You can check it each month and see if there have been any changes. This allows you to ensure that your debt management is helping your situation as well as give you the motivation that you will need to stay on track.
- Consolidating some of your loans or credit cards into one lower payment can make your monthly obligations smaller, which will ultimately lower your overall debt to income ratio.
By lowering your DTI, you help to establish that you can afford your new loan payments. It will not only convince the bank that you can pay them, but it will give you peace of mind that your new Fort Lauderdale conventional loan will be feasible.
NHL Lending and Your Fort Lauderdale Conventional Loan
Nationwide Home Loans has a team of expert loan officers waiting to talk to you about your mortgage options. They have some of the best conventional home loan rates in , and any borrower can find a loan that will meet their needs. With their knowledge and expertise, NHL Lending is the obvious choice for a lender. You can fill out the online as well as look at all the different programs that are available. Regardless of which step in the home buying process you are in, contact Nationwide Home Loans today and discuss turning your dreams of homeownership into your new reality.