If you’re a home buyer with excellent credit, a steady job, and 20% saved for a down payment on a home in Southern California or elsewhere in the United States you may be thinking “what is debt to income ratio and why does it even matter?” this is a great question to ask because in reality your debt to income ratio is one of the key indicators mortgage lenders look at to determine if you will be able to successfully pay mortgage loan or not each month.
How Does Debt To Income Ratio Work?
When a lender pulls your credit reports they will be able to see the actual debt that you have on a consistent basis and then once they divide that by your monthly income your lender will know your debt to income ratio.
As of today most mortgage loans, including FHA mortgages, have a maximum debt to income ratio (DTI) of 43% so this means that if your debt to income ratio exceeds this percentage you may not qualify for a mortgage loan. There are some larger lenders out there who may approve a mortgage loan for you if your DTI exceeds 43%, especially if you have an excellent payment history, so don’t lose hope if you have a higher than average debt to income ratio.
What to Do Before Applying For a Mortgage
One of the best things you can do BEFORE applying for a mortgage is to pay down some of your debts like store credit cards or students loans so you can effectively lower your debt to income ratio. Just remember to never close a credit account before closing on your home because keeping that account open will help your credit versus closing it which may hurt your credit score.
At Fred Sed Realty 50% of our business is working with buyers, helping them to get ready to buy and ultimately purchase their first homes, so if you have questions about debt to income ratio or would like to view homes for sale in Southern California contact us today by calling (800) 921-9231 or connect with us online.