When deciding whether to approve a mortgage loan one of the most vital things looked at is debt to income ratio. The comparison, or ratio, of how much debt a person has with their net income gives lenders vital information. Debt ratio is also simple to adjust and lower; anyone seeking a mortgage should give this serious consideration.
While different lenders have different precise formulas for determining an applicants debt ratio, the general rule is that the lender wants the applicant to have about 30% more net income than his total debt and expenses. Ideally, the applicant wants to have his outstanding debt at between thirty and forty percent of his income. If the applicant has more debt to service than income available, adding a mortgage payment to the mix is not a excellent thought. The debt ratio is also one of the key determinants to how much a lender is willing to loan and what the monthly mortgage payment should be.
Dividing the applicants net income in thirds, and lowering that number by the amount of outstanding debts determine the basic debt to income ratio. In other words, if the monthly income amount is $9000 and there is no debt then the lender will say that $3000 is available for a mortgage payment ($9000 3=$3000- $0 debt =$3000 available). If the applicant has outstanding debts equaling $3000 then the lender will perceive that there is no money available for a mortgage payment ($9000 3= $3000 – $3000 debt= 0). Having $9000 net income with $3000 in debt might not seem so terrible, but a mortgage lender would not view this in a positive light despite the variances in their calculations.
The debt ratio is not the only factor taken into account when determining an applicants ability to make mortgage payments or what those payments should be each month. Making a large equity investment, or down payment, usually has a direct bearing on what ones monthly payments will be. The same is right if the borrower has significant semi-liquid assets besides his regular monthly income, such as a large stock portfolio or retirement plot. These and other factors can offset a less than ideal debt ratio. Nevertheless, the applicants debt ratio is one of the key factors that most mortgage lenders will look at.
The key advantage relating to the importance of the debt ratio to the prospective home buyer is that this is a determinant that can be adjusted before applying for a mortgage. By paying off debt before applying for a mortgage, the potential borrower can significantly improve his chances of getting approved at reasonable terms.
Wendy Polisi is the founder of Credit Repair College and Finance the Dream. Credit Repair College empowers people to take control of their financial future by learning everything they need to know to repair credit on their own. For more information on credit repair secret please visit them on the web. Finance the Dream offers rent to own homes throughout the United States.