okay. so we’ve already gone over credit score and how mortgage companies use it to be able to approve you for a loan.
while i was busy being rejected because of my credit score, I learned about another important factor that caused my rejections: DTI: debt to income ratio.
this is just how it sounds: how much debt (monthly credit card payments, current monthly loan payments) you have in relation to how much money you are making. you want a low debt to income ratio (%).
To find yours, add up all your monthly debts (what you pay each month for your credit cards, car loans, student loans, etc) and divide it by your monthly income before taxes (stay tuned for part 2 of this post explaining more)
the lender uses this to see if, after all your monthly debts, you have any money left over to be able to pay a monthly mortgage payment. if you do have money left over, great! the amount left over will help determine how much you can afford.
I’ll show you how to do this yourself, in a later post, so you have an idea of where you are at before you go calling around to different lenders, having your credit pulled, and having your credit (hopefully not) damaged and getting your hopes up (hopefully not) for nothing.
knowing where your DTI is at before you start the preapproval process can either calm your worries or help you devise a plan to lower it.
also, as stated above, your DTI helps determine how much of a monthly mortgage payment you can afford. this is important knowledge to have before you call for preapproval.
- so you don’t ask for too expensive a loan, only to be rejected
- because whoever is prespproving you may (and should) ask what monthly payment you are comfortable with
- so you know what payment you can actually afford to pay per month while still being able to afford things like groceries (and other necessities).
a lender may tell you you qualify for a monthly payment of $2000 but that $2000 combined with your other monthly debts might eat up your entire paycheck leaving you with close to nothing for daily expenses. and that would be uncomfortable.
if you should calculate your DTI only to find that you can’t afford what you want, it’ll give you a great visual on where you are at financially and you can devise a plan to improve before you start your home search.