How Existing Debts can Affect the Purchase of a Home

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Lloyd Mize
Harvest Team Real Estate

Are you getting ready to buy your dream home? Then there are several financial things that need to be considered to ensure that you can get the necessary financing to pay for the property. Your lender will look at your overall financial picture, and one important consideration is your debt-to-income ratio.

Debt-to-Income Ratio: What is it?

Just because you have a high income, doesn’t mean that you can afford a big house. If you are bringing in a lot of money and carrying high debt payments, then there isn’t a lot left over for the mortgage. These other debt obligations increase your debt load and take up more of your fluid cash each month.

You can figure out your debt-to-income ratio by summing up the monthly debt payments and comparing that total with your gross monthly income. Lenders look at this number to see if you will be able to meet the monthly mortgage payments for the loan.

How Debt-to-Income Ratio Affects Your Mortgage

Historically, it has been found that borrowers with a high debt-to-income ratio have a difficult time meeting their monthly obligations. When the cash is already leveraged for debt payments, it puts additional financial stress on the family to add a bigger mortgage. As a rule of thumb, lenders are trying to keep your ratio under 43%.

What types of debt contribute to your debt-to-income ratio? Everything! Car loans, credit card balances, student loans, medical debt, mortgages and more. When a home buyer is carrying a large amount of debt, often the lender will offer a smaller loan and/or a higher interest rate.

So, if you are preparing to buy a home in the future, then it is important that you pay down your debt balances as much as possible. Decreasing your consumer debt load will improve your debt-to-income ratio, making it easier for you to qualify for a bigger mortgage.

Before you buy a home, it is important that you talk to an experienced real estate agent for advice. These tips will ensure that you find the right home for your family. Call Lloyd Mize at Harvest Team Real Estate at (951) 551-1677