While mortgage lenders take into account an array of factors when determining whether you’re an appropriate candidate for a loan, one of the largest considerations revolves around your overall debt and income. While many people have ratios which fall within standard limits, what happens if your debt ranks higher than what many lenders prefer?
While it may be tempting to give up hope or assume you’re doomed for a lifetime of renting, there are actually several options available that can help improve your situation before you even approach a lender.
LOWER YOUR RATIO: Let’s face it—unless there are extenuating circumstances, you’re probably not in a massive hurry to purchase a home. Yes, many of us want instant gratification; however, if you can exercise some discipline and set aside time to reduce your debt ratio in the months leading up to your purchase, you’ll be on the right track.
Find out what's happening in Cummingwith free, real-time updates from Patch.
While saving for your down payment is important, use this time to buckle down on your credit card balances, student loans, car payments, and any other loans in your name. Generally speaking, most lenders will want to see that your debt is less than 36% of your income.
INCREASE YOUR DOWN PAYMENT: This step might be a bit of a challenge for someone who is also actively attempting to pay down their debt; however, you will increase your chances of securing a loan if you can come to the table with a larger down payment. If you’re looking to borrow less, you will present as less of a risk. A large down payment tells the lender that you’re not only serious about the property, but that you are capable of managing your money and will be less likely to abandon the property.
Find out what's happening in Cummingwith free, real-time updates from Patch.
SEEK GOVERNMENT HELP: In an effort to convert renters to buyers, the government—particularly the Federal Housing Administration (FHA)—has created several programs, which offer loans to borrowers with higher debt ratios in order to qualify them for higher mortgage payment amounts.
In addition, veterans may also be able get assistance through a VA loan, which will approve applicants who have a debt ratio of up to 41%.
For other potential buyers who are interested in refinancing, the Home Affordable Refinance Program (HARP) exists to primarily target current homeowners who have a small amount of equity in their current property. Before seeking this type of loan, however, borrowers are encouraged to gather as much information as possible to prove that they are working hard to pay down their current debt.
In the end, a high debt-to-income ratio is not the end of the world. For those who are truly dedicated to lowering the amount that they owe and working with lenders to learn about the range of programs available, getting into a new home can happen sooner than you’d expect.
