February 28, 2018

Buying a House: Why You Need a Good Debt-to-Income Ratio

Written By Mary Beth Eastman
Last updated February 28, 2018

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You have long dreamed of owning your own home, but you’re uncertain if a mortgage fits into your budget. One key indicator of financial health is your debt-to-income ratio. Do you make enough money to comfortably pay a mortgage while keeping up with other loans and credit card payments? Your debt-to-income ratio can tell you. If the ratio is not favorable, you can take steps to improve it.

You can figure your own debt-to-income ratio rather quickly. You need to add all your monthly debt payments and divide that sum by your gross monthly income — the money you earn taxes and other deductions. The lower that amount is, the more likely you will be approved for a mortgage. In most instances, a ratio of 43 percent and above will make financing a home difficult. At that percentage, lenders fear that you will struggle to make timely mortgage payments, especially if any unexpected expenses occur.

If your debt-to-income ratio is preventing you from getting a mortgage, you should take immediate steps to lower the ratio and improve your financial bottom line. Also, don’t forget to check your credit score before you shop for a mortgage.

Obviously, paying off debt at an aggressive clip will quickly lower your ratio. Lenders will look at the payments you are making. If you are only paying credit card minimum balances, your debt ratio will remain high and lenders will not be impressed. Try to pay off any new charges each month and cut into the past principal as well. Pay more than the minimum on your student loans as well. Even an extra fifty dollars in the payment can make a dent in your debt and get you nearer to owning that house.

Experts also suggest upping your income. If your boss gives you a raise when asked, fantastic. In reality, you will probably need to take on a second job to bring down your debt. Working an extra ten hours a week is usually manageable and will do wonders for your credit.

Before you talk to a lender, know your debt-to-income ratio. If your number is high, take immediate, concrete steps to improve it. You may be surprised by how quickly you can make a mortgage possible. Also review how to get a home loan without great credit.

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