some ways to work around it.
The Ratio's the Thing
The amount you can borrow is determined by
the amount of your monthly mortgage payment and other debt as a percentage of
your gross monthly income. Lenders call this your ratio. If your debt-to-income
ratio greatly exceeds 36%, it can be a factor in your loan approval. Don't let
a high debt ratio interfere with your plans.
Here are some
Restructure Your Loan It's not set in
If you've got the cash, you can pay additional
loan discount points to drive down the interest rate. This is called a "buydown."
The lender will recalculate your debt ratio based on the lower monthly payment
and everyone comes away happy. Or better yet, negotiate with the seller to fund
your buydown. Yet another option is for the lender to fund your buydown. Making
a larger down payment has the same effect. Obviously, the more money you put down,
the less money you need to borrow which reduces your loan amount and debt-to-income
Lenders are much more willing to allow higher ratios
if you make a bigger down payment, because statistically, people who put more
money down are much less likely to default. If you put 20% down or more, that
eliminates the need for private mortgage insurance (PMI) which further lowers
your monthly payment and debt ratio.
Argue Your Case
Remember, obtaining a loan is just as
much a negotiation as buying a home, if the lender is willing to talk. Let's say
your current monthly housing expenses already exceed 28% of your monthly income,
but you're still managing it. If you have immaculate credit, decent savings, and
don't blow your money on luxury vacations, you're a reasonable credit risk for
the lender. Or perhaps you're anticipating more income from a job promotion, or
just graduated from law school or medical school with a 4.0 grade average-you
can argue you'll soon be gainfully employed.
And document it.
Another way to beef up your income is
to better document non-salary sources. Don't forget to count other sources, including
commission income, overtime, part-time income, seasonal income, child support
or adult family members who contribute to household expenses. If these sources
were consistent over the last two years, your chances are even better. If you're
self-employed, don't let the lender make a cursory glance at your last two years'
tax returns, without mentioning the new contract you just landed. Or show three
years of returns if your income was higher three years ago, or provide earnings
in the current year.
Liquidate or Restructure Your Other
Debt Get rid of it.
If you have consumer loans, credit
cards or student loans, pay them off. That could reduce your overall debt burden
enough to lower your ratio to an acceptable level. It's wise to start planning
this well ahead of shopping for a home. The other alternative is debt consolidation,
moving the high-interest loans into a more reasonable loan with easier monthly
Got All That?
it's time to look at the pitfalls to avoid.
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