Why Debt-to-Income Ratio Is Important When You Are Buying a House
When you choose a real-estate agent to help you find the right home to buy, he or she is likely to discuss many things with you, including your financial state and the amount of money you want to spend on a home. If you have not yet applied for preapproval for a mortgage yet, the agent will encourage you to do that, and one important factor to evaluate with this is your debt-to-income ratio. Here are a few things to understand about this ratio when buying a house.
What is debt-to-income ratio?
Debt-to-income ratio is something lenders use when determining whether they should approve home loans or not. In addition, they use this ratio to see how much money they can give to loan applicants if they are approved for home loans.
This ratio is calculated by dividing your debts by your income. The debts used in this calculation include all regular monthly debts you are paying on, such as credit-card bills, car loans, and student loans. The income used is your gross wages for the month.
What is a good ratio?
When lenders calculate this ratio for applicants, they consider a ratio of 43 percent or less to be good. Statistical information has found that people may experience problems paying off their mortgages if they have ratios higher than this.
What can you do to improve your ratio?
If you discover that your ratio is higher than this, your real-estate agent may give you tips for improving it. The best thing you could do is pay off debts you have. If you have extra cash on hand, use it to pay off your credit-card bills. If possible, refinance any loans you have to lower the monthly payments on them. In addition, you may want to find a way to increase your monthly income.
Why is this important when buying a house?
If you want to start looking at homes for sale and are not preapproved for a loan, you may encounter some problems. Real-estate agents prefer showing homes to qualified buyers, and the only way to get qualified is to get preapproved from the bank. If you are not quite ready financially to buy a house, you should work on getting your finances in order before you begin to look.
If you are ready to buy a house and are preapproved already, contact a real-estate agent to help you search for the right homes to view in your area.
