Debt-to-income ratio is a common term that home buyers start to think about when they begin shopping around for a home loan. Having a high debt-to-income ratio can potentially prevent a home buyer from qualifying for a mortgage. The more that a home buyer knows about debt-to-income ratio, the better prepared he or she will be when it comes time to take out a home loan.

For informational purposes only. Always consult with a financial advisor before proceeding with any real estate transaction.

What Is Debt to Income Ratio?

Debt-to-income ratio is the amount of money that a home buyer pays to lenders versus the amount of money that the buyer makes on a monthly basis. Debt-to-income ratio is calculated based on monthly income and expenses. For example, a borrower who must pay $600 in credit card debt, car loans and other debts, and who makes $4,000 per month, has a 15% debt-to-income ratio.

Why Is Debt-to-Income Ratio Important?

Debt-to-income ratio is important because the more debt that a person has, the more likely it is that they will at some point or another have difficulty making monthly mortgage payments. A low debt-to-income ratio is considered to be a good thing when an individual applies for a mortgage. A high debt-to-income ratio can cause the mortgage application to be declined, depending on how high it is.

How Much Debt Is Too Much?

Lenders draw the line at a 43% debt-to-income ratio, with around 1/3 of that debt dedicated to the mortgage. People who will have more than 43% debt-to-income ratio after taking out the mortgage are likely to have their mortgage application turned down. However, there are exceptions. Lenders may go as high as 50% debt-to-income ratio under some circumstances. Home buyers who want to take out a mortgage but who have a large debt-to-income ratio may need to shop around with different lenders to get a loan.

What If You Have Too Much Debt to Get A Mortgage?

A person who has too much debt to qualify for a mortgage typically has two options: pay off some debt, or make more money. Many people will tackle this problem by paying off a credit card or a car loan. Paying off debt can be difficult for someone who is also trying to save for a down payment or save money for moving expenses. This can take careful budgeting and may require a lot of time. Others may try to consolidate debt or pay off debt with a loan that has a lower monthly payment.

Instead of paying down debt, some people will instead ask for a salary increase at work, or seek a promotion. The method that an individual chooses to lower their debt-to-income ratio depends entirely upon the person’s circumstances.

Where Can You Find Out More Information?

Home buyers who want more information about debt-to-income ratio can find out more by talking to a reputable Apple Valley lender. A good lender can help a home buyer qualify for a loan. For more information about debt-to-income ratio, contact a lender in your area.

For informational purposes only. Always consult with a financial advisor before proceeding with any real estate transaction.