Why Your Debt-To-Income Ratio Matters When Buying A Home

When you are aiming to purchase a new home and are seeking a mortgage loan, one of the requirements you need to meet is to have an adequate debt-to-income ratio. This is a ratio that is determined by all your debt payments divided by your gross monthly income. 

Why a Debt-to-Income Ratio Matters

Debtors who have a low debt-to-income ratio are less likely to default on their debts. Therefore, it's important to have the best debt-to-income ratio possible so you can obtain a qualified mortgage. Smaller lenders may have a difficult time lending to you and larger lenders will need to make a good-faith attempt to prove that you will be able to pay back your loan.

There are some programs that are willing to work with you. For example, you may obtain a loan from the VA or an FHA loan even with a bad debt-to-income ratio. If you have a high debt-to-income ratio, you may have additional eligibility requirements. For example, if you can improve your credit score substantially, you may be able to overcome your debt-to-income ratio. However, the best solution is to find a way to lower your debt-to-income ratio.

Calculate Your Debt-to-Income Ratio Regularly

You will need to calculate your debt-to-income ratio on a regular basis to know where you are financially speaking. This is important because a better debt-to-income ratio is something that is developed over time. 

For example, you may come up with a strategy to repay your debts over time as a way to improve your debt-to-income ratio. You may be able to better pay off your debts when you have reduced your expenses. Avoid making large purchases unless you can pay cash to reduce your debt-to-income ratio. 

If you are able to increase your earnings, this is another effective way to improve your debt-to-income ratio and will also allow you to more easily pay down debt and improve your credit score.

Figure Out Your Strategic Financial Goals

If you find that you cannot obtain the mortgage you want, you may need to aim for a less expensive home. You should consult with a financial advisor and discuss your ultimate goal so you can eventually reach a position financially where you will be able to purchase the home you want.

Many home buyers will have a vague idea of what they need to purchase a home, but by being informed, you are much more likely to secure a mortgage.