The ratio is the Thing.
As we learned in Module 1, 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 solutions.
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. The more money you put down, the less money you
need to borrow which reduces your loan amount and debt-to-income
ratio. 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.
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
monthly housing expenses in rent 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.
Don't leave anything out. If you received money from
anyone, include it. This means 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.
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. This may require some
prior planning, which is always wise. Another alternative is debt consolidation, moving the high-interest loans into a more reasonable loan with easier monthly payments.
itemized list of the ways you can handle hurdles in the application process.
3 ways to increase your chances of getting a loan.
6 of 9