Debt to Income Ratio and How to Lower it

There are two types of debt to income ratios, yours and the banks. You know what you can afford each month so don’t go over that amount. Why would you? Are you really going to get that extra job, or work those extra hours to cover the balance? Probably not..

So the banks try to get every detail of your income and your bills in order to be sure you won’t be a “bad sale” for them. Don’t forget the banks are in business to loan money and WANT to give you a loan. Don’t assume they’re against you just because you aren’t getting approved for the loan that you know is over your budget anyways.

That being said, the banks usually allow you to borrow 40% of your gross income minus any other loans you may have. So if you make $50,000 per year ($4,166/mo) then you can afford 40% of that number which is $1,666 per month. Then minus your car loans, student loans and other mortgages or personal loans you might have. Also subtract the minimum payment on each of your credit cards.

After that you end up with $1,100 to spend on your mortgage. Not quite. Be sure to add in the new monthly taxes and condo fee if you’re looking at a condo.

Mortgage – $700
Taxes – $300
Car Loan – $250
Student Loan – $150

40% of Gross Income – $1,666   -   SUCCESS!

As long as your credit score is in line you should get approved for that mortgage payment.

Ways to increase your debt to income ratio are rather obvious. Get rid of your car loan and you’ll have an additional $250 per month to spend. You could wait an extra few months and put additional money to your car loan to pay it off before trying to get approved.

If that’s not in the near future there are more tricky approaches. Assume you’ve paid 2 years down on your $20,000 car with a payment of $377/mo. That means you’ve paid down about $8,000 if it’s at 5% over 5 years. Now, refinance your $12,000 balance over another 5 years (or even 6 years if the bank allows it) to get a new payment of $225/mo. That gives you an extra $150 per month to afford a bigger monthly mortgage payment. That’s about $30,000 of home over a 30 year mortgage! SO if you were looking at a $200,000 home, now you can start looking at a $230,000 home!

People always start the home buying process by saying “We can afford a $150,000 home”. Well that number can swing up or down quite a bit based on the interest rate you negotiate, the amount of taxes on that particular home and whether or not there’s a condo fee that needs to be included.

Remember every $150 per month you eliminate you receive another $30,000 worth of home to buy!

Finagle with your own bills and see if you can think of a way to lower your bills or increase your income per month to afford a bit more of home for you or you and your family. Please email me or comment on this blog with questions or comments about your mortgage.

Don’t forget to use my mortgage calculator! It will make you smarter just by playing with it, I guarantee it!

If You Think You Can’t Afford it; Chances Are You Can’t

The prospect of home ownership requires some serious financial soul searching. Before you even go shopping, you have to first figure out what you can afford. Maybe you’ve done this already and the prospects don’t look good. You know better than anyone and if you think you can’t afford it, chances are you can’t. The good news here is that there are some simple online tools that can help you make that decision. The tools are calculators that can determine your debt to income ratio, how much you can borrow and how much your mortgage will be and the term.

          First find a debt to income calculator, it’s the percentage of your gross monthly income that goes toward paying your debts. Input how much you make monthly and who you’re indebted to and for how much. Be sure to include all of your obligations such as mortgage payments, insurance and taxes, car payments-including taxes and insurance, credit card payments, student loans, alimony or child support. The lower percentage the better, it shows that you’ve been a good steward of your money and may qualify you for a better rate. A borrowing power calculator can determine how much you qualify to borrow based on your total income versus your debt obligations. You can use this in conjunction with a debt-to-income ratio calendar to help set goals and make you look as good as possible to lenders. Finally, you can calculate your mortgage by filling in the principal, interest rate and the term and you get an estimated monthly payment. You can compare interest rates, terms and varying down payments.

          If you’re dreaming about home ownership, online calculators are a great place to begin. You may be pleasantly surprised at what you can afford.