Your credit score is not the only factor in obtaining approval for a home loan. Your Debt to Income Ratio (DTI) is just as important.
There are two factors lenders consider when you apply for a home loan:
Your front-end ratio (or housing ratio) is the percentage of your current income that would be used for housing expenses. This includes your mortgage payment, real estate taxes, homeowner’s insurance, private mortgage insurance (PMI) and association dues if you plan to purchase in a planned community or condo.
Your back end ratio is the percentage of your income that would be used to cover monthly debt obligations, including credit card payments, personal loans, car loans, child support, student loans or any revolving debt.
To calculate your total DTI, add up your total monthly housing expenses and debt payments and divide it by your gross monthly income (how much you earn each month before taxes).
Lenders’ studies have suggested that if an applicant’s DTI is greater than 43%, the likelihood that they may run into problems making payments increases. There are exceptions to this guideline for some smaller creditors, but in order to amp your chances of approval, take action now by paying down your existing debt.
Not sure what debt to pay first? Performance Mortgage can help you take the right steps in achieving an optimum DTI before applying. Reach out to us at 877-892-8222 to schedule an appointment.