For first time home buyers, the process of buying a house can feel overwhelming long before you start looking at properties. Why? Because unless you plan on buying a house with cash, you’re going to need to finance that purchase with a home loan.
If you’ve never applied for a home loan before, you’re likely not sure what to expect and you’re guaranteed to encounter different terms that you’re not familiar with. Debt-to-income ratio is one of the most important terms you need to understand before you apply for a loan. Here’s what you need to know about this ratio and what it means for you as a first time buyer.
Debt-to-Income Ratio Defined
Your debt-to-income ratio is a simple way of looking at how much of your income you spend paying down your debts each month. The more debt you have each month and the lower your income is, the higher your ratio will be. The more you can increase your earnings and pay down your existing debt, the lower that ratio will be.
What This Means for Your Mortgage
When you apply for a mortgage, lenders look at many different factors. They’ll consider how much money you bring in each month, the total amount of debt you have, your credit score, and any savings you’ve built up before they offer you a loan.
You know that the higher your credit score is, the better your loan terms will be, but a high credit score won’t help you much if you’re spending most of your monthly income repaying your debts. Lenders will see you as relatively high risk. You need to decrease how much you owe to your creditors as much as you can before you apply for your mortgage.
How to Lower Your Debt-to-Income Ratio
The easiest way to make your application stand out to lenders is to lower your debt-to-income ratio before you apply. Avoid applying for new loans or credit cards until you qualify for a mortgage. Try to repay as much as you can on your existing debts each month to decrease how much you owe and find ways to increase your income permanently. The less you owe and the more you make, the better your ratio will be.
Ready to Explore Your Options?
If you’re ready to look into loan options and discuss how much home you can really afford, don’t wait. Reach out to our team. We’ve helped hundreds of first time home buyers get into the perfect house for their budget.